Papa John’s controversy cost the chain $51M last year

The chain closed 104 domestic locations in 2018 after same-store sales fell amid the dispute with John Schnatter.
Photograph: Shutterstock

The John Schnatter controversy cost Papa John’s $50.7 million last year as the company and its domestic franchisees closed more than 100 locations, the Louisville, Ky.-based chain said Tuesday.

Domestic same-store sales at the chain declined 8.1% in the fourth quarter ended Dec. 31 and 7.3% for the full year, as the chain struggled to generate customers following comments the company’s founder made during an earnings call in November 2017—as well as his use of a racial slur during a conference call that prompted his departure over the summer.

The pizza chain said that its revenue declined 20% in the fourth quarter, to $374 million from $468 million in the same period a year ago. The company recorded a $13.8 million loss in the period, or 44 cents per share, down from a profit of $28.5 million in the same period a year ago.

When adjusted to take out one-time costs, the company had a net income of $4.6 million, down from $23 million a year earlier.

The $50.7 million in charges for the full year included $15.4 million in financial assistance to domestic franchisees “in an effort to mitigate closings.”

It also included $10 million in marketing contributions in the fourth quarter and $19.5 million in legal and advisory costs from a special committee set up to handle the controversy as well as an evaluation of strategic opportunities.

That evaluation led to a $200 million investment from activist investor Starboard Value, whose CEO Jeff Smith is now Papa John’s chairman. Smith in a statement said he has met many of the chain’s employees and said he looks “forward to working closely” with management “to develop additional product, menu and customer engagement strategies.”

One of the biggest challenges is the health of that franchisee base. Despite the financial assistance, franchisees closed 186 locations in North America last year. They opened 83 and acquired another 62 from the franchisor.

For the year, the company had a net decline of 104 locations and it now operates 3,337 restaurants in North America. That was a unit-count decline of 3%.

All of that was offset by international development. Papa John’s had net unit count growth of 208 international restaurants—the chain now operates nearly 2,000 restaurants outside the U.S. and 5,303 systemwide, up 2% from a year earlier.

Executives said on the company’s earnings call Tuesday that many of the closures were of nontraditional locations and that they expected a “step down” in closures this year, though the company expects the unit reductions to continue.

“Obviously, the quicker we can turn the sales around, the more optimal we’ll have potential on the overall net units hitting at the higher end of our range” of global unit growth between 75 and 150 net new units worldwide, CEO Steve Ritchie said on the earnings call.

Papa John’s is projecting same-store sales to be down 1% to 5%. That would be a substantial improvement over the 10% decline the company said it had in January.

Indeed, executives said that “we’re seeing very solid improvement” in February from January.

“We’re not proud, necessarily, of a negative 1 to negative 5,” Ritchie said. “We’re very pleased with the progress, thus far here in February on the backs of getting back to talking about quality.”

Papa John’s has continued providing royalty relief to operators in the first quarter. Ritchie also said the company is working to improve unit economics, through waste management and labor productivity efforts.

Executives said the company plans to continue with menu innovation in the coming months, including six “handcrafted” pizza offerings in March. The company is also testing value strategies targeted at pickup customers.

Papa John’s is also studying investment opportunities behind the company’s strategic plan.

“We remain confident in the long-term potential of Papa John’s,” Ritchie said, noting that the company’s quality positioning and the investment from Starboard give executives reason for optimism.

“We know we must improve how we communicate and connect with customers. It is not just about spending more on advertising and promotions. We need to do a better job of showcasing our quality as a real product differentiator while making it easier for our customers to purchase our pizza whenever, wherever and however they want.”

UPDATE: This story has been updated to include quotes from company executives from the Tuesday earnings call.

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