Papa John's shares rally as new ads fuel sales, investors expect acquisition

  • A feud with founder John Schnatter that started in July has thrown Papa John's into turmoil.
  • Sales have remained elusive as fewer customers are buying pizzas from the chain.
  • Investors are questioning if Papa John's can really initiate a turnaround or if an acquisition is the best route to recoup losses.
Former NFL Star Cris Carter Delivers Papa John's Pizza In Phoenix, Arizona
Mike Moore | Getty Images

Papa John's lackluster performance during the third quarter was expected, but a smaller decline in same-store sales and renewed excitement about a possible sale sent shares up nearly 6 percent Wednesday.

A feud with founder John Schnatter that started in July has thrown the company into turmoil. Sales have remained elusive as fewer customers are buying pizzas from the chain and franchisees have been torn between the old regime and the new one.

While same-store sales were not as poor as expected, they were still down nearly 10 percent in the quarter, raising questions about if Papa John's can really initiate a turnaround or if an acquisition is the best route to recoup losses.

"Papa John's posted another eventful quarter, while challenges clearly remain, there were some encouraging signs as sales trends improved late in the quarter," Peter Saleh, analyst at BTIG, wrote in a research note Wednesday. "The improvement and positive commentary on October supports a better sales outlook for [fourth quarter 2018] and into 2019, though we are not convinced the concept is out of the woods quite yet."

The pizza chain's sales improved in September over the previous two months, the company said in releasing its third-quarter earnings Tuesday. Executives credited the improvement, in part, to a new ad campaign that replaced Schnatter's image with other employees and franchisees in the company. As the company's official spokesman, Schnatter's image covered Papa John's pizza boxes and he represented the company in commercials.

CEO Steve Ritchie told analysts on a conference call that the YouGov Brand Index indicated consumer sentiment toward the company had shifted "from largely negative to neutral or positive" during the period.

Shares of Papa John's have recovered from hitting a 52-week low of $38.05 on Aug. 8 after it released disappointing second-quarter earnings the day before. They've rebounded by about 48 percent since then to more than $56 a share in morning trading Wednesday.

Chris O'Cull, analyst at Stifel, said he thinks it's because "investors expect the company will be acquired."

"The company did not comment on whether it was pursuing a transaction or any strategic alternative," he wrote in a research note Tuesday. "However, given the deteriorating fundamentals, investors need the company to find a buyer soon, in our opinion."

Papa John's enlisted the help of Bank of America and Lazard to explore a sale and has attracted initial bids from both corporate and private equity buyers, people familiar with the process have told CNBC.

However, initial bids do not always result in a sale and there will likely be at least one more round of bids before a buyer is selected.

While there are indications that Papa John's may be interested in putting itself up for sale, including sweetening its severance plans for top executives and staff, the company has continued to decline to comment about the matter.

"Still plenty of work ahead, but progress being made, [same-store sales] likely bottoming, and there are multiple paths leading to further value creation," Alexander Slagle, analyst at Jefferies, said in a note to investors Wednesday.