Papa John’s International Inc. struggled to sell pizzas even before a controversy flared up around its outspoken founder — a point he seized on in a blistering critique.
The chain, where John Schnatter resigned as chairman last month, reported comparable sales in North America that fell 6.1 percent in its latest quarter. That was weaker than analysts’ estimates and sent the stock down as much as 12 percent in late trading — and led major shareholder Schnatter to sound the alarm.
“History shows that the company performs better with me involved, and it declines when I step away,” Schnatter said in a statement following the release of results.
Even before media reports in July that Schnatter used a racist slur on a conference call — unleashing a wave of backlash — the pizza chain had trouble attracting diners in a fiercely competitive restaurant industry. Its efforts to offer more discounts and revamp ads haven’t worked so far, adding fuel to Schnatter’s campaign to oust existing leadership.
“Instead of addressing the real and fundamental issues confronting the company since that time period, and taking actions to turn sales around,” Schnatter wrote, “the company is trying to deflect attention from the source of the problem — management’s ongoing failures with regard to financial performance — and blame me for its problems.”
The company, however, says Schnatter’s recent controversy is weighing down performance, especially since news broke in mid-July that he’d used the offensive language. North American same-store sales fell 10.5 percent in July, after the latest quarter ended, Papa John’s said in a filing Tuesday.
“Near term, it’s bad,” said Bloomberg Intelligence analyst Michael Halen. “Who knows if this is the management team to be able to turn it around. This business is attractive; I would think it would be attractive to a private-equity buyer who could turn it around outside of the public eye.”
A company spokeswoman declined to comment.
Due to the recent negative publicity, Papa John’s will incur “significant costs” for remodeling, a new ad campaign, a company audit and legal costs, the company added in a statement Tuesday. It’s also giving financial assistance to franchisees who’ve been hurt by Schnatter’s statements “to mitigate closings,” it said. It estimated those total costs at between $30 million and $50 million for the remainder of the year.
The shares dropped as much as 12 percent in after-hours trading Tuesday. The stock had tumbled 27 percent this year.
While Schnatter has since apologized for his racist statements and said his language was taken out of context, the company has tried to distance itself from its outspoken former leader.
Still, Schnatter is on the board of directors and owns about 29 percent of the stock. He’s been urging investors to seek new leaders at Papa John’s. He earlier blamed disappointing sales on NFL Commissioner Roger Goodell, arguing that protests over the national anthem at NFL games were hurting ratings — and Papa John’s business.
Meanwhile, rival Domino’s Pizza Inc. has created an advantage with its tech innovations around mobile and digital ordering. The largest pizza company in the U.S. by sales is locking in customers with its rewards program, and has made recent moves to remodel its stores. Pizza Hut, however, attempting to stage a domestic comeback, recently reported a surprise drop in same-store sales.