Papa John’s International Inc. faces a steeper decline in sales in the aftermath of controversies surrounding comments made by founder John Schnatter.
For the second quarter ended July 1, same-store sales were down by 6.1 percent, even more than expected, according to chief financial officer Joseph Smith.
And comps for July were even worse, he said, down 10.5 percent for the period from July 2 to July 29.
Meanwhile, Schnatter issued a statement of his own Tuesday, shortly after the company’s 2nd quarter earnings announcement.
Schnatter, who stepped down as chairman of the board of directors on July 11 following revelations about a racist epithet he used in a conference call, blamed CEO Steve Ritchie and the board of directors for the chain’s poor performance and saying he planned to remain involved with the company.
“I am not going away and will continue to fight to do what’s best for the company and its employees, franchisees, shareholders and customers,” Schnatter said.
The company’s management has moved to distance the chain from Schnatter following his resignation, removing him from marketing materials and advertisements and voting to evict him from his offices at Papa John’s Louisville, Ky., headquarters.
Schnatter remains on the board of directors, although he is no longer its chair, and is the company’s largest shareholder, owning about 30 percent of its shares.
Since the revelation of Schnatter’s comments, numerous college and professional sports teams have moved to distance themselves from the chain, discontinuing deals such as Major League Baseball’s Papa Slam, which gave pizza discounts to fans on the day after their team hit a grand slam, and even removing the chain’s name from the University of Louisville’s stadium, where Schnatter had purchased naming rights.
Sports promotions have long been a cornerstone of Papa John’s marketing, and that helped sparked controversy in an earnings call last November, when Schnatter blamed declining sales in part on the National Football League’s failure to quell players’ silent protests during the national anthem, which possibly affected viewership.
At the time Papa John’s was an official NFL sponsor, although it has since been replaced by Pizza Hut.
Following negative public reaction to those remarks, Schnatter stepped down as CEO and was replaced by Steve Ritchie, who already was president, at the beginning of 2018.
CFO Smith said the company had adjusted its same-store-sales forecast for the year to a decline of between 7 percent and 10 percent and expected debt to adjusted EBITDA to exceed 4X by the end of the year.
Analysts Peter Saleh and Ben Parente of BTIG said in an earnings review that Papa John’s debt-to-earnings ratio “could potentially breach the 4.25X limit within their current covenants,” with their lenders, meaning Papa John’s would need to renegotiate its debt.
“At the end of Q2 we are comfortably within our debt covenants,” Smith said, “but based on our revised lower financial forecasts, we have proactively begun discussions with our bank group … if any accommodation is needed, we fully expect that we will be able to obtain one.”
The BTIG analysts agreed, but added that Papa John’s would have to pay for it.
“We expect Papa John’s will negotiate some leniency on this [debt-to-earnings ratio], with a higher interest rate as well,” they said.
Meanwhile, Ritchie outlined plans to turn the company around, both financially and culturally.
He said he’d promoted Victoria Russell to the position of chief of diversity, equity and inclusion.
“Victoria has been instrumental in forming and leading our Diversity and Inclusion Committee beginning late last year and has shown tremendous passion for the brand,” he said, adding that the company had hired Nimbus, a Louisville-based communications company with expertise in diversity and inclusion, “as our multicultural agency of record to help us further align or internal and external D&I efforts on the communication strategy.”
Meanwhile, in terms of marketing, Ritchie said that Endeavor Global Marketing, which it had hired in July as its new agency of record, would work to refocus the chain’s messaging on its value proposition while also reestablishing trust with its customers.
“Moving forward, these efforts will take into account what customers, in particular Millennials and Gen Z consumers, expect from a business, including their expectations that companies have an active role in making the world a better place.”
He said customers would see that messaging emerge in the fourth quarter.
Ritchie also announced the rollout of new technology that he said would allow the chain to leverage its new preferred national partnership with third-party delivery company DoorDash and voice ordering by Alexa to reach customers outside of Papa John’s current delivery area.
“Papa John’s is a mature delivery player with tremendous reach,” Smith said. “However, there are still many customers in outlying rural areas, even some suburban developments, who live outside of our delivery zones,” he said. DoorDash would help extend delivery to those customers.
“More than 1,000 restaurants in hundreds of cities across the United States will soon be able to expand their delivery areas utilizing DoorDash technology to serve communities that would have otherwise been excluded,” he said.
Schnatter, for his part, said he didn’t expect the company’s efforts to work.
“Results under my leadership demonstrate that I know what works and what doesn’t work for this Company. Indeed, history shows that the company performs better with me involved, and it declines when I step away. I have little doubt that the company’s financial performance will continue to deteriorate under the current CEO and board of directors.”
Papa John’s shares opened sharply lower Wednesday, down by more than 6 percent from Tuesday’s closing price.
Contact Bret Thorn at [email protected]
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