Better Marketing, Better Sales, Papa John's

Danny D'Nagy profile picture
Danny D'Nagy


  • Discounting strategy and public relations nightmare continue to haunt margins short term.
  • Strong hiring practices and improving guidance point to a potential image restoration.
  • Turnaround DCF valuation reveals hidden value for investors.

Source: The Takeout


When you tie your brand wholly to your founder and that founder jumps into racial slur-infested waters, the brand will inevitably sink as well. Papa John's International, Inc. (NASDAQ:PZZA) was unable to escape this very fate - its share price now 52% off its late 2016 highs. However, management has slowly but carefully severed the ties between its sinking founder and the brand. Selective hiring and a re-established corporate identity have resulted in Q2 guidance that hints at a potential turning point for the struggling pizza chain.

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Investment Thesis

According to its Q2 10-Q, PZZA will be forced to pivot its gargantuan Marketing Fund and Starboard Value investments "in response to negative consumer sentiment which has impacted comparable sales." As brand rehabilitation is prioritized over increasing margins, PZZA's financials may continue to stagnate, leading into the final two quarters. However, PZZA's newest executive hires and marketing strategy reveals a defined corporate identity and a long-term plan. If the plan is effectively executed, my DCF model projects an almost 30% rise in stock price.


A comparison between PZZA and Domino's Pizza, Inc. (DPZ) reveals a painful divergence in gross profit margin. Whereas DPZ seeks to improve margins by spinning off less profitable restaurants to franchisees, PZZA has embarked on a fierce price-slashing campaign. In their Q2 earnings call, management emphasized their dedication to the $6 medium price point, a particularly difficult goal from a profitability standpoint, considering PZZA brands itself as the highest-quality pizza. Lower margins and negative comps have created a significant hurdle for CEO Steve Ritchie's turnaround efforts.

ChartData by YCharts


Another aspect investors should take note of is PZZA's expensive stock. For the past few months, the market continued to price PZZA at more than 40x earnings - making them more expensive than

ChartData by YCharts

This article was written by

Danny D'Nagy profile picture
Hungarian who believes in the American Dream. Accounting and finance undergraduate student at Truman State University. Emphasis on value and reasonable growth within basic materials, consumer cyclicals, and financials.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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