Papa John's (PZZA) is a Hedgeye Restaurants Best Idea Short.
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Robert Lynch, CEO of Papa John's, expressed optimism on the organization's most recent earnings call, highlighting its dedication to quality, innovation, and value. The company reported a 3% increase in North American comparable sales, driven by higher transactions rather than price increases, contrasting with industry trends. The company-owned restaurants saw a 6% SSS growth, benefiting from lower food costs and improved restaurant-level margins. However, the adjusted operating income remained flat due to the dilutive impact of newly acquired UK restaurants. Lynch highlighted the company's digital prowess, menu innovation, and strategic pricing, contributing to its growth. Despite all this, we see some challenges ahead.
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International Issues Can Get Worse: The UK acquisitions negatively impacted overall operating income despite solid sales growth in North America. International comps were down less than 1%, with mixed regional performance. The company is experiencing dynamic international operating environments, particularly in the UK, Asia, and the Middle East. The UK market's current drag on profitability and the cautious international outlook may concern investors. The downward adjustment of net new unit development guidance reflects uncertainty and potential market challenges.
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Persistent Margin Pressure: In 3Q23, adjusted operating margins decreased slightly to 6.4%. Domestic company-owned restaurant margins improved by 130bps due to lower food costs and labor efficiencies. The UK acquisitions impacted profitability negatively, which might improve over time, but the line of sight is limited. Adjusted operating margins for 2023 are projected to be down compared to 2022, mainly due to the UK acquisitions.
- Competitive Landscape and Promotions: DPZ has been aggressive with promotions, such as offering 50% off discounts for a couple of years. The move to a delivery platform will accelerate PZZA's need to discount more. The most significant negative is that the increased promotions will not drive category growth. The situation is furthered, but the company focuses on premium innovation and delivering value across all segments, including limited-time offers (LTOs), core menus, and aggregator channels.
First Watch Expands Company-Owned Portfolio with Acquisition of Six Florida Restaurants
First Watch Restaurant Group announced a significant expansion within Florida. As of November 13, 2023, the company has successfully acquired six previously operated restaurants under franchise agreements. From Destin to Tallahassee, these locations mark a strategic move in the company's growth plan and are likely significantly accretive to the business. Chris Tomasso, CEO and President, highlighted the decade-long service of the franchise partners in the Florida Panhandle and their role in ensuring a smooth transition. This acquisition reflects First Watch's commitment to expanding its direct ownership and operational control. In 2023 alone, First Watch has brought 23 restaurants formerly run by franchisees. This move is part of a broader strategy to strengthen the brand's presence and operational excellence, particularly in Florida. The acquisition was strategically funded using the company's cash reserves. As a reminder, sales trends in FL slowed significantly in October.
McDonald's and Crocs Cook Up a Tasty Footwear Collaboration: The Exclusive McDonald's x Crocs Collection
Having a little fun with this Press Release and collaboration with CROX, which is a BEST IDEA SHORT from @HedgeyeRetail
In 2Q23, McDonald's experienced a surge in U.S. sales following the popularity of the Grimace Birthday Meal. Now, taking this one set further and in an "exciting" collaboration, McDonald's, a renowned fast-food giant, is joining forces with Crocs, the popular footwear brand, to launch an exclusive collection.
This innovative partnership will bring to market a range of shoes, socks, and Jibbitz charms, set to be available at Crocs stores and on their website starting November 14. The debut McDonald's x Crocs Collection is a blend of style and iconic characters, featuring the Grimace x Crocs Cozzzy Sandal, Birdie x Crocs Classic Clog, Hamburglar x Crocs Classic Clog, and the McDonald's x Crocs Classic Clog. The collection, priced between 70 and 75 per pair of shoes and 20 per pair of socks, promises to be a unique offering for fans of both brands. This launch is particularly notable as it marks McDonald's first foray into character-based footwear. Adding to its innovative approach, the company is developing CosMc's, a new compact store format. Set to be tested in select markets from early next year, CosMc's is designed to offer the essence of McDonald's in a smaller, distinctively branded setting. More details about this new concept will be revealed at McDonald's Investor Day in December, as shared by CEO Chris Kempczinski.
