Restaurants

Let the finger pointing begin: Papa John's shares plunge as pizza sales fall, current and former CEOs pass the blame

Key Points
  • The pizza chain's stock has fallen 17 percent since its founder admitted to using a racially charged slur on a conference call.
  • Investors will be keen to see if Papa John's updates it same-store sales forecasts, which it reiterated last quarter.
Signage is displayed outside a Papa John's International pizza restaurant in Louisville, Kentucky.
Luke Sharrett | Bloomberg | Getty Images

It didn't take long for Papa John's shares to tank and the finger pointing to begin.

The company's shares plummeted by almost 12 percent in aftermarket trading Tuesday after the pizza chain released second-quarter earnings that missed nearly every key estimate tracked by Wall Street — profit, revenue, same-store sales — and said its pizza sales would be significantly worse than previously forecast.

Current CEO Steve Ritchie blamed the weak sales on some highly publicized foibles by founder and former CEO John Schnatter, while Schnatter shifted the responsibility back to his former protegé Ritchie.

Investors have been waiting to see how much damage the company has sustained following a very public and nasty feud with Schnatter that started last month. Shares were down more than 17 percent since he was forced to give up his post as chairman July 11 after admitting to using a racially charged slur on a conference call in May — before Tuesday's slide.

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Papa John's founder issues statement on company's earnings

The earnings report showed that sales at locations open for at least a year were already suffering before the spat. Same-store sales fell 6.1 percent in the quarter, worse-than the down 4.9 percent Wall Street had predicted, according to StreetAccount. Comparable store sales from July 2 through July 29 plunged even more, falling 10.5 percent from the same time last year, the company said.

Ritchie told analysts on a conference call that some off-color comments made by Schnatter last fall were still driving away customers. Schnatter criticized the NFL, which Papa John's sponsored, for failing to curtail players kneeling during the national anthem to protest police brutality against people of color. The matter got even worse after Forbes reported last month that Schnatter used the N-word on a May conference call.

"On the marketing front, the research and analysis we conducted after the NFL comments by our founder in November of 2017 have made it clear that we needed to move away from a founder-centric marketing plan," Ritchie said on the call. "Obviously, the recent events have further evidenced that we need to move on."

The company lowered its outlook for same-store sales for the year, saying executives now expect sales at stores open for at least a year to fall between 7 percent and 10 percent this year. The company previously estimated that they wouldn't fall by more than 3 percent.

"After the July 11th article that came out from, again, very inexcusable and irresponsible comments from Mr. Schnatter, we saw another precipitous drop of roughly 4 percent from the trend," Ritchie said.

Schnatter shot back with his own statement:

"As I communicated to the Board as early as December 2016 and several times in 2017, I am seriously concerned about the company's declining sales, financial performance and, most importantly, the direction the company headed under the stewardship of Steve Ritchie and the current board of directors," he said in a statement after the earnings release. "The financial results announced today further exemplify that concern."

Schnatter's comments are just the latest barb in the ongoing feud between the company's founder and its board.

The board of directors stripped Schnatter's image off the company's marketing materials and barred him from using his office at the company's Louisville, Kentucky, headquarters. Schnatter countered with a lawsuit, accusing the board of acting negligently and staging a possible coup to get rid of him. The brouhaha, which exploded after the quarter closed June 30, didn't affect second-quarter earnings. But franchise owners say pizza sales and foot traffic have fallen off a cliff since then, focusing investor attention squarely on what to expect in the future.

And future same-store sales could be even worse. Peter Saleh, analyst at BTIG, estimates that same-store sales in the third quarter will be down 9.1 percent. However, Stifel's analyst Chris O'Cull, projects that the metric could be down as low as 12 percent.

One franchisee, who asked not to be named, said sales at his shops have fallen between 5 and 20 percent, depending on the location, since the founder's

The company said net income fell to $11.7 million, or 36 cents per share, down from the $24.1 million, or 65 cents a share, it reported in the year-ago period. Excluding the impact of China refranchising, the company earned 49 cents per share, missing analyst expectations of 54 cents per share, according to Thomson Reuters estimates.

Revenue declined 6.1 percent to $408 million from $434.8 million in the year-ago period. Wall Street had expected revenue of $425.5 million in the quarter.

WATCH: Papa John's slides after earnings miss

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Papa John's sinks after decline in Q2 earnings