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Consumers Going Cold on Pizza

Some wonder if the whole pizza-to-go franchise trend isn't doomed.
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Despite positive earnings guidance from

Papa John's

(PZZA) - Get Papa John's International, Inc. Report

last week, pizza-chain sales are expected to remain sticky next year.

Although mediocre results over the past year make year-over-year comparisons seem easy, analysts believe that the increasing popularity of low-carbohydrate, low-fat diets, as well as competition within the pizza category, could nonetheless make for messy results for the group in 2004.

"We are not convinced that the pizza segment has returned to health overnight, and believe that inconsistent sales and higher commodity costs could continue to drive erratic results at

Papa John's," said Fitzhugh Taylor, an analyst at Banc of America Securities, in a research note.

Last Friday, Papa John's said it anticipates earnings of $2.20 to $2.28 a share next year, above consensus estimates of $2.08 a share. The company predicted sales to be flat to up 2%.

In reaction, shares of the heavily shorted stock rallied. They are up 20% over the past two weeks, during which the company also tapped a new marketing chief, but down 12% for the year.

On Monday, Taylor raised his price target to $27 from $24, based on a multiple of 12 times his new 2004 earnings estimate of $2.21 a share. But he warned investors about his outlook.

"We would caution that our visibility for a turnaround remains low, and that a month of negative comps could send the stock down as quickly as it has appreciated in the last two weeks," Taylor said.

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Even Papa John's said it is not clear the trends for the category have begun to improve. According to the company, transactions in the pizza segment have declined for the last seven quarters through August.

Over the past year, increasingly health-conscious consumers have avoided the fatty pies. As a result, some companies have offered menu alternatives.

Yum! Brands'

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Pizza Hut, for example, introduced a low-fat pizza in October.

Nevertheless, some analysts believe that it is as weird to portray pizza as low-fat as it to portray fried chicken. "People who are most concerned about their diet would not choose pizza anyway," said Michael Smith, an analyst at Oppenheimer, who has issued a sell recommendation on Papa John's for the last 14 months.

In a recent research note, Smith said he continued to be "nonplussed" by the pizza-delivery category. "The more sophisticated food requirements of today's consumers create stagnant industry format," he said, adding that competition from "Take and Bake" operations, where pizza is made fresh to order and shrink-wrapped on a baking pan, as well carry-out offerings from casual diners such as




is heating up.

"The future of delivery pizza is more clouded than it was two or three years ago," Smith said.