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Feb 22, 2017

S3 BLACKLIGHT: Short Sellers Are Having a Pizza Party

The fourth largest pizza chain in the U.S., Papa John’s Intl. Inc. (PZZA US), was down 6.73% today after reporting 4th quarter sales figures that missed estimates. PZZA reported 4th quarter sales of $439.6 million versus estimates of $446.9 million, but on the positive side, reported earnings of $0.69/share and beat estimates by $0.03. PZZA is projecting 2017 EPS at $2.83, a 10.98% increase from 2016.

PZZA’s has not been an attractive target for short sellers with its stock price increasing 53.2% in 2016. Short interest averaged $210 million in 2016 and is now at $254 million, up $24 million, or 11%, in 2017. Short sellers did not have a successful year shorting PZZA in 2016, incurring $103 million in mark to market net of financing losses for a negative return of 49.2%. With today’s stock price drop, short sellers have been able to recoup some of their 2016 losses, and are up $21.5 million, or 8.3%, in 2017.

Domino’s Pizza Inc. (DPZ US) reports its earnings next week on February 28th and short sellers have been very active in the stock this year. DPZ short interest is $865 million, up $482 million, or 126%, this year. DPZ is down 3.4% after hitting its year to date high of $188.92 yesterday. Domino’s 4th quarter EPS is estimated at $1.43, a 24.4% increase year-on-year, and 2017 projected EPS is $5.07, a 20.43% increase from 2016.

DPZ short sellers have not done well in 2016 or 2017. DPZ short interest averaged $447 million in 2016 and incurred a $179.5 million mark to market net of financing loss, down 40.14%. Thus far, 2017 has an average short interest of $477.7 million with a loss of $58.7 million, down 12.29%.

With DPZ’s short interest climbing much more thanPZZA’s in 2017, and with PZZA’s 4th quarter EPS up only 11.2% year-on-year, do traders think that DPZ’s projected 20.43% year-on-year 4th quarter EPS increase is too high a hurdle to clear? U.S. restaurants have experienced a 2 year decline in same store sales with companies like Texas Roadhouse (TXRH US) recently reporting a 4th quarter miss in both revenues and EPS. DPZ’s same store sales growth, at 4.5%, is the clear winner in the pizza restaurant segment and if increased labor costs, foreign exchange exposure and international expansion can be managed, their EPS and revenue numbers can be met handily. Short sellers are hoping that DPZ is late delivering profits on its overseas expansion, app based innovations and supply chain efficiencies.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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