Papa John's is set to report second-quarter earnings after the markets close Tuesday, but investors won't be paying much attention to its profits.
They're waiting to see how much damage the company has sustained following a very public and nasty feud with founder John Schnatter that started last month. Shares are 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.
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 shot back 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, won'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.
"Second-quarter results are largely an afterthought at this point, we expect the focus for all participants will be sales trends in the initial weeks of ... (July) as investors gauge how bad near-term sales declines could be," Peter Saleh, analyst at BTIG, wrote in a research note Monday.
However, the company's woes started long before Papa John's was locked in a bitter battle with its founder.
Since hitting an all-time high of $90.49 per share in December 2016, Papa John's stock has lost more than half its value on disappointing same-store sales growth that executives blamed on everything from increased competition with other pizza chains to the National Football League's handling of player protests during performances of the national anthem last fall.
Sales growth at stores open for at least a year was strong in 2016, peaking during the third quarter. But that growth started to slip by the fourth quarter of that year and has progressively gotten worse. By the fourth quarter of 2017, same-store sales turned negative and have continued to decline.
Wall Street projected a 4.9 percent drop in same-store sales for the second quarter in North America, according to an average estimate of analysts polled by StreetAccount. Analyst projections for the rest of the year are far worse.
Saleh is a little more pessimistic, estimating a 5.9 percent drop in same-store sales in the second quarter, followed by a 9.1 percent decline in the third quarter and 4.7 percent drop in the fourth quarter.
The company's franchise owners have already seen a drop in foot traffic and sales. 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 July 11.
"The sales trend changed abruptly following the NFL comments in late October and after the founder's admission of using a racial slur in mid-July," Chris O'Cull, a Stifel analyst, wrote in a July 30 investor note. "Admittedly, the transaction trend was not great prior to the NFL incident, but it's hard to argue the sharp change in trend was related to anything other than the consumer reaction to these incidents."
O'Cull is forecasting double-digit drops in same-store sales for the last half of the year: a 12 percent decline in the third quarter and 10 percent in the fourth.
Investors will be keen to see if Papa John's changes its previous forecasts for same-store sales, which executives said will be down 3 percent to flat.
Shareholders also will be looking to hear how Papa John's plans to work with its franchisees, who've become collateral damage in this battle royale.
"We believe Papa John's may need to strike a deal with its franchisees to avoid store closures and/or lawsuits following the decline in sales caused by the company's public relations issues," O'Cull said.
O'Cull suggested Papa John's will need to provide royalty relief or make contributions to the national advertising fund to support franchisees. The company has held discussions on the matter but has not disclosed how it will assist franchisees.
However, some franchisees are skeptical of any relief they may receive from the company.
The current situation is "pretty scary," one franchisee, who asked to remain anonymous, told CNBC last month, adding that he might have to close stores if the falloff in business continues.
"If they reduce our royalties temporarily due to John's PR issues, they will just raise our commissary prices to make up for it and then some," the franchisee said.
Franchisees are particularly vulnerable because they are locked in long-term contracts that require them to pay Papa John's for all marketing materials and food as well as a percentage of their sales.
The dough, cheese and other products that franchisees need to make the pizzas are proprietary and must be bought through the Papa John's commissary. The company controls prices and can raise costs, and "franchisees cannot really do anything about it."
The franchisee said the company hikes the commissary prices to make sure that Papa John's gets its guaranteed returns, even when sales are soft.
"We believe management's priority needs to be recovering sales and supporting the franchise base," Saleh said.