Papa John's swings to a loss as embattled pizza chain spends millions to repair tarnished image

Key Points
  • Papa John's reported earnings that missed Wall Street expectations after the markets closed Tuesday.
  • The company spent millions during the period to repair its tarnished image.
  • Papa John's same-store sales were a bright spot in otherwise disappointing earnings.
Signage is displayed outside a Papa John's International pizza restaurant in Louisville, Kentucky.
Luke Sharrett | Bloomberg | Getty Images

swung to a loss and missed Wall Street earnings forecasts after spending millions of dollars during the third quarter to repair its tarnished image following a nasty public feud with its founder.

The company's lackluster performance was not altogether unexpected, but a smaller decline in same-store sales, a key metric for restaurant brands, does a lot for investor confidence. Shares of the company rose more than 3 percent in aftermarket trading Tuesday.

Here's what analysts polled by Refinitiv expect:

  • Adjusted earnings per share: 20 cents vs 22 cents
  • Revenue: $364 million vs. $393.7 million
  • Overall same-store sales: down 9.8 percent vs. down 10.7, according to StreetAccount

Papa John's has been thrown into turmoil since its public feud with former CEO and Chairman John Schnatter broke in July. Sales have tanked, traffic is down and franchisees have been divided, some siding with Schnatter, others with the company and the rest caught between the two.

The company lost $13 million, or 41 cents a share, during the third quarter, compared with a profit of $21.8 million, or 60 cents a share, during the same period last year, the company said after the market closed Tuesday. After adjusting for certain items, the company earned 20 cents a share while analysts expected 22 cents a share, according to average estimates compiled by Refinitiv.

The company excluded $24.8 million in special charges from its adjusted earnings that included $3.6 million in costs to remove Schnatter's image from its marketing materials and $9.9 million in financial assistance to its franchise owners.

The company generated $364 million in revenue, down 15.7 percent from $431.7 million during the same time last year – missing analysts' estimates of $393.7 million.

"During the quarter, we took important actions resulting in improved consumer sentiment and North America comp sales that were slightly ahead of expectations," Steve Ritchie, CEO of Papa John's, said in a statement Tuesday. "While the operating environment remains challenging, these early indicators combined with our strong cash flow give us confidence in the consumer initiatives underway across the Company."

The company's same-store sales were a bright spot in otherwise disappointing earnings. Same-store sales in the quarter fell 9.8 percent across all North American locations, better than the decrease of 10.7 percent analysts had expected, according to StreetAccount.

Company-owned locations saw same-store sales fall more 13.2 percent, steeper than the 11.8 percent analysts had expected according to StreetAccount. Its franchised locations, however, fared better than expectations, posting same-store sales that were down 8.6 percent, better than the 10.5 percent drop that was forecast.

Ritchie said that sales in September showed improvement over July and August, in part because of its new "Voices" ad campaign. It replaced Schnatter's image, which has long been central to the company's marketing and signage, with the other faces from within the company.

Ritchie told analysts the company had a "strong positive response" to the new campaign.

"Employees and franchisees express their appreciation for shedding a light on the real values and people who make up our company," he said on a conference call Tuesday. "Customers also responded positively which shows that the strategy to move in the new more modern and inclusive marketing direction is the right one."

He said YouGov Brand Index shows the consumer sentiment toward the company is shifting "from largely negative to neutral or positive."

"The negative publicity surrounding the company's brand that began in July 2018 has continued to impact the North America system-wide sales and the company cannot predict how long and the extent to which negative publicity will continue," the company said in its earnings report Tuesday.

The company expects to spend between $25 and $35 million in the fourth quarter on financial assistance for its franchisees, marketing, legal fees and the cost of hiring a consultant to audit the culture at Papa John's.

The company also updated its same-store sales forecast. It now expects same-store sales to be down between 6.5 and 8.5 percent for the full year, a smaller range than the 7 to 10 percent decline it had anticipated previously.

The last two years have been difficult for Papa John's. Since hitting an all-time high of $90.49 per share in December 2016, its stock has lost nearly 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 worsened. By the fourth quarter of 2017, same-store sales turned negative and have continued to decline.

That downward slide has only been inflamed by the July incident.

The company said it spent $3.4 million more in financing costs due as it accumulated more debt, paid higher interest rates and repurchased some shares. The company renegotiated its debt agreements with its lenders, which cut the company's credit limits and raised its interest rates during the quarter, the company previously said in a regulatory filing last month.

Investors aren't as focused on Papa John's profit as they are about buyout rumors, Peter Saleh, analyst at BTIG, said.

The company appears to be preparing for a potential sale, sweetening its severance plans for top executives in case of a "change of control," or a possible sale. The plan, which took effect Nov. 1, pays "parachute payments" if the company changes hands and the executives decide to leave within the first two years due to no fault of their own, the company said in a regulatory filing Friday.

It would pay current CEO Ritchie three years of his base salary as well as a "retention equity grants" equal to three times his base salary, or more than $4.9 million based on his 2017 base salary of $820, 377 — plus other incentives.

Shareholders would be keen for a sale, as it would be a relatively fast way for them to recoup their investments. Analysts and investors are looking forward to the earnings conference call for more clarity on the matter.