John Schnatter: ‘I am not going away’

The intensifying dispute between Papa John’s and its beleaguered founder is shrouding the company in more uncertainty, says RB’s The Bottom Line.

The Bottom Line

John Schnatter wasn’t on Papa John’s quarterly earnings call Tuesday, making comments on the company’s performance.

So he issued his own.

In the midst of the call, Schnatter sent out a statement on the company’s performance, laying the blame squarely with the Papa John’s current management. The chain’s largest shareholder at 30% is now an activist investor, agitating for change back to where things were.

“I am not going away,” he said, “and will continue to fight to do what’s best for the company and its employees, franchisees, shareholders and customers.”

The statement intensified a battle between Schnatter and the company he founded, and where he remains its largest shareholder. It’s a battle that ensures Papa John’s will be shrouded in uncertainty for the foreseeable future as the company and its former CEO battle over who is responsible for the chain’s tumble.

On Tuesday, Papa John’s said that its same-store sales declined 6.1% in the second quarter, then fell further to a 10.5% decline in July, amid the revelation of Schnatter’s use of the N-word during a conference call and his subsequent resignation as chairman.

Executives on the earnings call painted a dim picture of the chain’s state. They said they are working with lenders to avoid violating restrictions on Papa John’s loan agreements.

They also expect franchisees to close restaurants amid the steeply declining same-store sales and are taking steps to avoid that. Those steps include temporary royalty relief.

Historically, franchise systems hate cutting royalties even for a short time, meaning that Papa John’s is legitimately worried about the health of many of its operators.

“We’ll be doing some things to help support our franchisees in a time of need, to make sure that we’ve got healthy unit economics to mitigate as much pressure on closures as we can,” CEO Steve Ritchie said on the earnings call.

Papa John’s executives believe that problems are rooted in Schnatter’s comments, beginning with statements he made suggesting NFL player protests were the root cause of the chain’s same-store sales problems and then with the controversy last month.

“The research and analysis we concluded 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. “Obviously, the recent events have further evidenced that we need to move on.”

But Schnatter does not agree with this. His statement on Tuesday portrayed himself as a potential savior of the company rather than the source of its problems.

“Results under my leadership demonstrate that I know what works and what doesn’t work for this company,” he said. “Indeed, history shows that the company performs better with me involved, and it declines when I step away.”

And he said that the company’s same-store sales began worsening long before he made those November comments.

“The company’s performance began to decline long prior to my comments about how NFL leadership was failing to resolve issues to the satisfaction of players and owners,” he said. “While the comments I made during the conference call with Laundry Service were seriously misrepresented, the actions taken by the company have been misguided, heavy-handed and malicious.”

Before those comments, Schnatter was not only Papa John’s founder and its 30% shareholder—he was also its CEO and its chairman. Ritchie was the company’s president until he took over as CEO in January. Both Schnatter and Ritchie were present on every conference call, with the founder making numerous comments.

But Schnatter in his statement said that Ritchie “assumed CEO responsibilities in mid-2016,” and has been at the helm of a deteriorating company. And he said that the company is trying to deflect attention from “management’s ongoing failures with regard to financial performance” by blaming Schnatter for its problems.

It’s true that Papa John’s same-store sales were deteriorating in the quarters leading up to the November comments. Same-store sales deteriorated from 5.5% growth in the third quarter of 2016 to just 1% by the third quarter of 2017.

Yet they fell further after the November comments, to a 3.9% decline in the fourth quarter and ultimately a 6.1% drop in the second period before falling further in July after the most recent controversy broke out.

These declining sales numbers correlate with a drop in consumer sentiment about Papa John’s, based on data from Technomic’s Consumer Brand Metrics.

And Ritchie, on the earnings call, said that operators support the decision to remove Schnatter as the company spokesman.

“Franchisees and partners have expressed overwhelming support for our new advertising and marketing campaign and our decision to remove John Schnatter as our brand spokesperson,” Ritchie said.

Exactly what happens here remains to be seen. But the comments and Tuesday’s earnings report sent Papa John’s stock to a five-year low, suggesting that it probably can’t be sold, at least right now.

“We continue to see an uncertain path to recovery,” BTIG analyst Peter Saleh wrote in a note Wednesday, “and believe a sale of the company is unlikely, as founder John Schnatter continues to advocate for more control, not less.”

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