Papa John’s Pizza reported its Q2 2018 earnings on Tuesday, and the numbers were ugly.
The embattled pizza chain missed expectations on earnings per share (49 cents vs 54 cents expected) and on revenue ($408 million vs $424 million expected), but most importantly its same-store sales in North America, a crucial metric for food chains, fell by 6% in the quarter. In the month of July alone, same-store sales fell by 10.5%. Papa John’s (PZZA) lowered its same-store sales guidance for 2018 to negative 7% to negative 10%.
After the bad numbers came mud-slinging by both the current CEO and former CEO.
Steve Ritchie vs. John Schnatter
On the earnings call, CEO Steve Ritchie, who became CEO in December 2017 when Schnatter gave up the post, blamed “Papa” John Schnatter for the weak performance. “We are not dependent nor should we be on one person,” he said. “Franchisees and partners have expressed overwhelming support for our new advertising and marketing campaign and our decision to remove John Schnatter as brand spokesperson.”
Schnatter, who resigned as chairman of the board in July after a report that he used the n-word on a business call, but has since said he regrets resigning and is fighting to regain control, issued his own statement: “Today’s results highlight the further deterioration of Papa John’s financial performance under the tenure of Steve Ritchie… I know what works and what doesn’t work for this Company.”
In other words, Ritchie and Schnatter actually agree on something: Papa John’s needs to change.
The pizza chain needs to do something deeper than simply removing Schnatter’s face from its logo, pizza boxes, and vans. It needs a fundamental rebrand.
And Papa John’s is preparing to spend big to do it.
The company said it has “developed a preliminary range of $30 million to $50 million for the remainder of 2018” for costs, including: “reimaging, the accelerated replacement of certain branded assets, financial assistance to domestic franchisees, branding initiatives, our third-party audit of the culture of Papa John’s, and additional legal and advisory costs.”
That’s up to $50 million it will spend in just the final third of the year to scrub Schnatter’s image from marketing materials, help struggling franchisees, do a culture audit, and pay legal costs.
Has Papa John’s seen the worst of it yet?
Appropriately, an analyst on the call, Will Slabaugh of Stephens, pressed Ritchie on whether things will get worse before they get better, asking “if you feel like we’ve seen the worst of it maybe in mid-July.”
There’s a lot to unpack from Ritchie’s answer to that question.
First, he said, “I think I’d first go back to last year, all the way back to November. I think it’s important to understand the impact of consumer sentiment. If you go back to the third quarter of 2017, we were 1.1% positive, and directly after the earnings call, we saw a very sharp decline.”
November was when Schnatter blamed flat quarterly sales on the NFL anthem protests and said that the kneeling “should have been nipped in the bud” when Colin Kaepernick first started kneeling. That’s when Schnatter’s downfall truly began, long before the July 2018 report about his use of the n-word.
Then Ritchie said, “After the July 11 article that came out from, again, very inexcusable and irresponsible comments from Mr. Schnatter, we saw another precipitous drop of roughly 4% from the trend. So we do think, as you saw negative 10.5% for July, we do think we have stabilized a number there… We do think we’ve experienced the significance of the decline, and we’ve provided our outlook based on the infancy of what we have seen.”
There are two ways to interpret that. You could say Ritchie sounds fittingly aware of the consumer sentiment damage that was done, and acknowledges Papa John’s needs to fix its image fast. Or you could see it as naive, or wishful thinking, for him to suggest that July’s sales drop was the worst it’ll get.
Meanwhile, at least two pro sports teams are sticking by Papa John’s. The Dallas Cowboys say they’ll stay partners with the brand even though it is no longer the “official pizza of the NFL” (that title now belongs to Pizza Hut), and the New York Yankees have restored their partnership with the brand one month after suspending it. In a statement, the team said it is confident the company has repaired the damage from the Schnatter scandal: “We are confident the company will continue to take the appropriate measures to show their commitment to preventing such an egregious incident from happening again in the future.”
Analysts have more serious doubts that a rebrand will work. “We continue to see an uncertain path to recovery,” BTIG analyst Peter Saleh wrote in a note on Wednesday. He also said a sale of the company, which is the result some shareholders may hope for, “is unlikely, as founder John Schnatter continues to advocate for more control, not less.”
Daniel Roberts is the sports business writer at Yahoo Finance. Follow him on Twitter at @readDanwrite.