Bulletin
Investor Alert

The Ratings Game

March 1, 2021, 3:40 p.m. EST

Papa John’s, Domino’s look to new non-pizza menu items to fuel growth

Tonya Garcia

Papa John’s International Inc. (NAS:PZZA) and Domino’s Pizza Inc. (NYS:DPZ) are pizza businesses at their core, but both delivery chains have turned elsewhere for new menu items, and growth.

“At the start of 2020, Papa John’s innovation mindset was taking hold as proven by a wave of successful new products, including garlic parmesan crust, Papadias [an Italian flatbread sandwich], and jalapeño poppers, which drove strong Q1 performance and a third consecutive quarter of positive comp sales at that time,” said Rob Lynch, Papa John’s chief executive, on the fourth-quarter earnings call.

With 2021 underway, Lynch continued to talk up these items and their value to each transaction.

“[I]nstead of buying, on average, two pizzas, people are buying two pizzas and a Papadia,” he said. “That rose check very quickly.”

Domino’s Pizza Chief Executive Ritch Allison talked about how new chicken wings and sauces were “enthusiastically embraced” by customers during that company’s earnings call, also this week.

Allison said that Domino’s new cheeseburger and chicken taco pizzas are among the bestsellers from their specialty lineup.

As 2021 wears on and the need for innovation continues, both companies will look far and wide.

“There’s a lot of opportunity to innovate against pizza, lots of interesting ideas in the pipeline,” said Papa John’s Lynch in a separate call with MarketWatch. “There are lots of chances outside of traditional pizza.”

Read: McDonald’s new chicken sandwich should give the fast-food giant the boost it craves

Besides food, both companies aim to use technology and service as a differentiator. When the coronavirus pandemic shifted much of consumer buying activity online, pizza chains were uniquely prepared , having built out their businesses for just this sort of customer interaction.

Both have continued to emphasize that advantage.

“We have made big investments in the last year for better ways to deliver to current customers and better information for development strategy to meet the needs of lots more customers,” Lynch told MarketWatch.

With COVID-19 vaccines rolling out and both companies and investors looking ahead, Lynch said Papa John’s would not make a “huge departure” from the “strategic priorities” that have benefited his company during COVID like marketing and technology.

In addition, Papa John’s is focused on what Lynch calls the “premium” nature of the company’s food.

“We will continue to bring innovation and not race with Domino’s or Pizza Hut to sell the cheapest pizza,” he told MarketWatch. “We think our product warrants a premium price.”

Pizza Hut is part of the Yum Brands Inc. (NYS:YUM) portfolio.

Lynch used as an example the launch of a soft-crust pizza priced at $12 where many competing pizzas are priced under $10.

Domino’s holds up its value pricing as an asset.

“Value is always a key focus for us and that won’t change in 2021,” Chief Executive Allison said on the call. “More than ever, with many Americans out of work in these uncertain economic times, value matters. And we’re committed to maintaining our unquestioned position of value leadership within the QSR [quick-service restaurant] pizza segment.”

Domino’s reported fourth-quarter earnings and revenue that missed expectations.

Papa John’s earnings missed expectations , but the company reported better-than-expected revenue. Special year-end bonuses for workers impacted the earnings result by about 6 cents.

And: Beyond Meat lands deals with McDonald’s, KFC, Taco Bell and Pizza Hut; stock surges despite lukewarm earnings

“We continue to view the long-term dynamics of Domino’s unit growth, sales driving initiatives, technology innovation, and infrastructure as competitively sound, but expect optimism around its topline compares to weigh on its near-term prospects,” wrote MKM Partners in a note.

MKM rates Domino’s Pizza stock neutral with a $380 fair-value estimate, down from $420.

MKM also rates Papa John’s stock neutral with a $102 fair-value estimate.

“Balancing out management’s intermediate-to-long-term enthusiasm, in the face of potentially stifling near-term record compares starting in the spring, creates an atmosphere where investors may be forced to take a more guarded approach to the shares,” MKM analysts said.

Stifel rates Domino’s shares hold with a $390 target price, down from $400.

“While we remain constructive on the company’s long-term fundamentalprospects, we anticipate shares will remain range-bound until investors gain greater comfort the company can retain a significant portion of the sales growth it experienced during the pandemic, ” analysts wrote in a Domino’s note.

Don’t miss: Bill Gates roasted for saying rich countries should eat ‘100% synthetic beef’

RBC Capital Markets says Domino’s carryout business will be an advantage going forward.

“Prior to last year, carryout represented ~45% of U.S. transactions, and while that declined in 2020 as delivery demand increased, it remains a key focus for Domino’s and an area of improvement for 2021,” analysts wrote.

“And looking beyond leveraging carryout as a way to play defense against growing delivery competition, carryout presents the opportunity to expand margins (vs. lower-margin delivery transactions), which should further support already-strong unit economics and thus further unit development.”

RBC rates Domino’s stock outperform with a $428 price target, down from $449.

Domino’s stock is up 2.1% for the last year.

Papa John’s stock has surged 63.4% over the past year.

The S&P 500 index (S&P:SPX) is up 32.1% for the past year.

Link to MarketWatch's Slice.