Papa John’s same-store sales keep falling, and that could mean more store closures over the next six months.
That’s according to Stifel analyst Chris O’Cull, who projects that Papa John’s could lose 150 to 250 locations over the next six months if those sales problems persist. Most of those would be in noncore markets.
He believes same-store sales are falling in the 10% to 11% range. “We are surprised the company’s aggressive promotions the past several weeks have not curtailed the sales declines, and we believe if the trend persists that it could lead to accelerating store closures during the next six months,” O’Cull wrote.
And, he said, sales have to improve profitably.
Papa John’s is clearly worried about store closures as part of the fallout over a controversy surrounding founder John Schnatter that has engulfed the chain all year and is showing no signs of going away.
The company is providing a relief on royalties to some of its franchisees and is also vowing other assistance in a bid to keep stores open.
While Papa John’s has historically been among the more aggressive franchises when it comes to providing royalty relief—it did so as an incentive for development coming out of the recession—franchisors are historically loathe to give that royalty relief out to existing locations.
The controversy began last November, when Schnatter appeared to blame NFL player protests during the national anthem for his chain’s falling sales. They worsened in July when he admitted using a racial slur during a conference call, and the company removed the former chairman and CEO from its ads.
The issue has raged on since, as Schnatter has fought vigorously to retain his involvement in the company and has blamed the chain’s problems on existing management and, notably, CEO Steve Ritchie, his own handpicked successor.
Regardless, U.S. same-store sales have deteriorated badly in the months since those NFL comments, including a 6.1% decline in the second quarter and a 10.5% decline in July.
As it is, the company is clearly worried about its franchisee base. Just nine months of weakening same-store sales have led to a 21-unit reduction in store count at a time when rival Domino’s added 250.
Papa John’s has 3,407 locations in North America, 2,729 of which are franchisee owned.
Schnatter himself has hinted at major issues, saying in a lawsuit unsealed this week that Papa John’s “financials are in freefall” and that without court intervention “the harm will be irreparable.”
Details on those financials were redacted from the complaint.
The biggest problem for Papa John’s appears to be in markets where it has a relatively small presence.
The company had enjoyed consistent same-store sales growth for years until 2017, when they began to fall. That decline clearly frustrated Schnatter, who was clearly angry at the NFL back in November, saying that it “failed Papa John’s shareholders.”
But it’s also been enough to push some operators over the edge, leading to the decline in unit count.
Continued sales declines, therefore, could devastate many of these markets, leading to the closure of a third of the chain’s restaurants in noncore markets.
O’Cull wrote that there are about 600 locations in these markets, including the West Coast and Northeast, with about 200 franchisees operating five or fewer locations. As many as 250 closures in these markets would represent well over a third of those restaurants.
What he doesn’t say is that the remaining stores in those markets would likely struggle even more as they lose penetration in those areas. It would make store growth in future years all the more challenging.
And a sales recovery will be a tall order. While Papa John’s has some marketing and advertising upcoming, it has lost its NFL sponsorship to rival Pizza Hut. Domino’s continues to flex its muscles, and the pizza market is super competitive. Oh, and let’s not forget some ongoing management changes.
Schnatter himself is not going away, threatening to keep that issue in the limelight for the time being.