Rising Costs And Consumer Shifts Will Diminish Future Prospects

Key Takeaways

• Shifting consumer preferences and rising costs are driving long-term pressure on Papa John's revenue and profitability despite efforts to innovate and streamline operations.
  
• Dependence on third-party delivery and ongoing store closures risk weakening brand equity and limiting systemwide sales and royalty income growth.
  
• Digital innovation, international expansion, product development, cost-saving measures, and enhanced loyalty programs together strengthen growth, profit margins, customer retention, and long-term shareholder value.

Catalysts

Operates and franchises pizza delivery and carryout restaurants under the Papa Johns trademark in the United States, Canada, and internationally.

• The increasing health consciousness and focus on wellness among global consumers poses a significant threat to Papa John's core offering of traditional, indulgent pizza. Even as the company invests in menu innovation, it is likely to see a secular long-term decline in demand for its core products, which will suppress future revenue growth.
  
• The company faces persistent cost headwinds from rising labor costs, including higher minimum wages and ongoing worker activism. Management acknowledged that domestic company-owned restaurant EBITDA margins declined by over two percentage points due to labor inflation, suggesting continued net margin compression over the long term.
  
• Volatile input costs driven by climate change are already manifesting in higher food costs, especially in proteins and cheese, which Papa John's leadership called out as material to the quarter. This trend is expected to persist, further pressuring cost of goods sold and eroding profitability despite supply chain optimization initiatives.
  
• The company's high dependence on third-party delivery aggregators exposes it to growing commission costs and reduces control over the customer experience, while major competitors and new delivery-only brands continue to scale aggressively. Over time, this is likely to weaken Papa John's brand equity and cause net margins to contract further.
  
• Ongoing store closures-particularly in North America and China-reflect underlying franchisee profitability challenges and competitive market pressures. With guidance indicating North American closures will be at the high end of the historical average and international closure rates elevated, total systemwide sales and recurring royalty income are set to stagnate or decline, limiting earnings growth.

Papa John's International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Papa John's International compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Papa John's International's revenue will decrease by 0.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 3.6% today to 3.0% in 3 years time.
• The bearish analysts expect earnings to reach $63.7 million (and earnings per share of $1.9) by about August 2028, down from $74.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 29.1x on those 2028 earnings, up from 20.9x today. This future PE is greater than the current PE for the US Hospitality industry at 23.1x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.12%, as per the Simply Wall St company report.

Papa John's International Future Earnings Per Share Growth

Risks

• Rapid growth in digital and mobile ordering, combined with targeted investments in app experience, personalization, and AI-driven consumer engagement, is driving higher transaction volumes and customer retention, which directly supports long-term revenue and earnings growth potential.
  
• International expansion, including operational improvements and brand turnaround in major markets such as the UK and opportunities in the Middle East and Asia, is delivering above-average comparable sales growth and establishing new franchise revenue streams that will positively impact total system-wide sales, earnings, and return on invested capital over time.
  
• Strong innovation pipeline around core pizza products, premium menu offerings, and adjacent categories, powered by consumer insights and oven technology upgrades, is increasing average ticket size and attracting new customer segments, which is likely to drive upward trends in both top-line revenue and gross margins.
  
• Significant cost-saving initiatives, such as supply chain optimization and procurement renegotiations, are projected to realize over $50 million in savings with substantial gains beginning in 2026 and full benefits by 2028, directly bolstering unit-level and consolidated margins and overall profitability.
  
• Enhanced loyalty programs and CRM strategies, supported by ongoing marketing investments and robust digital channels, are leading to higher order frequency, increased customer counts across all segments, and greater consumer lifetime value, which are structural tailwinds for sustainable growth in revenue and net income.

Valuation

• The assumed bearish price target for Papa John's International is $42.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Papa John's International's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $67.0, and the most bearish reporting a price target of just $42.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $63.7 million, and it would be trading on a PE ratio of 29.1x, assuming you use a discount rate of 10.1%.
• Given the current share price of $47.57, the bearish analyst price target of $42.0 is 13.3% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.