Skift Take
Papa John's was already having sales troubles earlier this year, before the fallout with the company's founder. Now, however, the situation is exponentially worse: the company is expecting an unspecified number of store closures and potentially double-digit sales declines by the end of the year.
— Erika Adams
Papa John’s is hurting in every way possible, according to its most recent earnings report. Same-store sales were down 6.1 percent in the first six months of the year compared to the same period the year prior, total revenues were down 5.5 percent in the same period, and income before taxes was down 45.6 percent.
Papa John’s is juggling the same cost increases as every other chain in the industry — minimum wage hikes, higher operating costs — but it’s balancing that alongside the very public disaster that is its founder, John Schnatter.
The result? Nothing is going well, and it’s not going to get better anytime soon. The company took an extra step in its report and broke out its July same-store sales, which decreased over 10 percent, in order to show that Schnatter’s comments, followed by his firing, followed by more reports on a history of harassment and discrimination, had a huge impact on recent sales. Given that information, plus the fact that the company is going to have to invest a ton of money in erasing Schnatter’s face from every company pizza box in America, Papa John’s now expects U.S. sales declines in the 7 to 10 percent range for the rest of the year, as opposed to the 0 to 3 percent decline that it previously expected.
Franchisee Fallout
The updated sales forecast “assumes a number of store closures in the U.S.,” according to Papa John’s CFO Joesph Smith. The company did not give an estimated number despite repeated analyst inquiries on the company’s second quarter earnings call. The situation is bad enough, however, that CEO Steve Ritchie said “we are having an open dialogue with many in our franchise community discussing the most appropriate and effective forms of temporary support as a result of these recent events.”
“While we are still finalizing the level of support, we expect that it may include short-term royalty reductions, reimbursement for certain costs related to individual restaurants core and other assistance,” he continued. Bloomberg has previously reported that some Papa John’s franchisees are seeing double-digit sales declines in the wake of Schnatter’s racist comments and subsequent firing.
Income from royalty fees has already decreased by $2.7 million in the past three months, according to the earnings report, partially due to reductions that the company has already granted to hurting franchisees.
And, just in case anyone thinks that the extent of the damage has been laid out here, Papa John’s wants to remind investors that it could get even worse. “At this time, the company cannot predict how long and the extent to which the negative customer sentiment will continue to impact future sales,” the company stated in its earnings report.
The Comeback Plan
On the call, CEO Steve Ritchie tried to keep the conversation pointed towards the future. He outlined a comeback plan that included a DoorDash partnership to strengthen delivery sales, a heightened focus on value pricing (a plan that franchisees who are already hurting on sales are sure to love), new voice ordering capabilities with Amazon’s Alexa (nobody show him this report detailing how nobody buys anything through Alexa), and a comprehensive, Schnatter-free advertising campaign to roll out later this year.
“We are working to demonstrate that our future will not be defined by the words and actions of one person,” Ritchie said, trying to reiterate the company’s commitment to the future on the call. That one person is trying as hard as possible to stay in the picture, however. Schnatter published his own press release soon after the company released its earnings report, detailing how none of this was his fault and the company should just reinstate him and he’ll fix all of its problems.
Papa John’s left a lot of questions in the air after the call, but if the company can only be sure on one thing for the rest of the year, it’s that Schnatter is definitely not coming back into the picture.
