John Schnatter has left all of his positions with Papa John’s, a company he used to oversee as its chairman and CEO and largest shareholder, as well as its primary spokesman. He doesn’t even own enough stock to warrant public reports after unloading most of it.
That hasn’t kept him from commenting on the company routinely after his departure. The latest comment comes from Seeking Alpha, the investment site where he is now a columnist.
Suffice it to say, Schnatter thinks the company is currently overvalued. “Unless the company is acquired, the downward pressures on the stock price seem to outweigh any upward pressures,” he wrote. The column mostly blasts Papa John’s current management for destroying his company.
Papa John’s may well be overvalued. In reality, his column is an inadvertent indictment of Schnatter’s own tenure, one that left the company with bad sales, closing restaurants and diminishing profits.
Recall that Schnatter’s tenure at the company collapsed beginning with comments he made during an earnings call in 2017 in which he seemed to blame NFL player protests for weak ratings and, therefore, his own chain’s weakening sales. Things became invariably worse by July of the following year when he acknowledged using the n-word during a conference call.
Schnatter had already resigned as CEO. The company ousted him as chairman and ended his founder’s agreement. Schnatter ultimately left the board the following March and subsequently sold his stock.
He has vehemently defended himself since, denying that his use of the term was in any way racist and chiding the company for not doing more to defend him. “Through litigation,” he said, “I am demonstrating the meaning of the comments I made in 2018 were reversed and completely mischaracterized in the media and the company board at the time failed to protect the brand we had built over 34 years.”
In any event, Schnatter believes things have gone downhill since he left, saying again that Papa John’s pizzas aren’t as good, “based on the subpar product I have detected personally over the past two years, as well as the unsolicited feedback I frequently get from the general public.”
But he also cited Domino’s leapfrogging of Papa John’s in the 2020 American Consumer Satisfaction Index.
To be sure, surveys like that can be a lagging indicator of performance. That said, it is indicative of the challenge the company faces even now with its sales in the stratosphere—the past couple of years have damaged its primary selling point, no matter who is at fault.
Schnatter also chides the company for its workplace habits, noting that it was selected as one of the best places to work in Kentucky by that state’s Chamber of Commerce. “The company has been notably absent from that list since my departure.”
Maybe. But the Forbes writer who first found out about Schnatter’s racist remark was investigating Papa John’s “toxic culture”—and Schnatter very much had a role with the company. And the CEO at the time, Steve Ritchie, was Schnatter’s handpicked successor. The two were on earnings calls together for years before Ritchie became CEO.
In any event, it’s tough for anyone to put a company that was the subject of such a biting story on any list of top workplaces.
Schnatter believes that the diminished quality and the workplace problems are to blame for what has been particularly weak same-store sales. He says top-level management “has no direct experience in the pizza industry,” and nor does the company’s current directors.
He then says the company “was struggling to correct its sales slide early in 2020,” and notes that three-year cumulative same-store sales were down 7.2%.
It’s quite true that sales were down at the outset of 2020. But most of those three years were in the aftermath of the aforementioned NFL conference call—an earnings call that, whether Schnatter likes it or not, put the company at the center of a massive controversy and sent the chain’s sales and everything else tumbling.
Yet sales were already troublesome. These are Papa John’s same-store sales starting in the first quarter of 2016, and running through the first quarter of 2019, when the Schnatter era ended for good. You might notice a pattern.
Papa John’s SSS 2016-2019
Source: Technomic, Restaurant Business
Papa John’s was clearly seeing weakening same-store sales, an understandably unusual thing for a chain that had enjoyed consistent increases for years. After bottoming out in the third quarter of 2018, when his alleged n-word comment became public, they began improving.
Now look at the trend since. Papa John’s sales had been improving going into the pandemic, albeit in part because of easy comparisons.
Papa John’s SSS 2019-2020
Source: Technomic, Restaurant Business
It’s safe to say that Papa John’s faced a long recovery without COVID-19, and that the recovery was put into overdrive when consumers were stuck in their homes ordering pizzas all the time. But it’s also very much true that the sales slide began long before Schnatter left the company for good.
Schnatter did note that it is unrealistic to expect ultra-strong pizza sales to continue. “When our economy, and more importantly the dining sector, likely returns to some sort of normalcy in 2021, it’s very likely these recent sales gains will fall by the wayside just as the virus itself likely will,” he wrote.
That’s probably true. It’s realistic to expect a fall back to earth for Papa John’s and just about every other delivery provider as the pandemic wanes and people return to normal. All of these chains will face amazingly difficult comparisons next year. And they will be challenged to keep the customers they’ve gained.
Schnatter also notes this: “Company executives have demonstrated a failure to maintain proper quality in product and service, as well as net store unit growth (there are now fewer North American stores than when I left the company—4,284 vs. 3,441), thus pursuing a business plan that cannot sustain a credible performance in the share price …”
Ah, that’s true. But the company’s U.S. unit count decline, much like the sales, started earlier.
Papa John’s unit count
Among the most notable elements of Papa John’s two-year decline was the quick nature of unit closures. Despite years of same-store sales growth, operators quickly began closing their doors the moment sales began to struggle.
That suggests that sales in some parts of the country were particularly weak. It also suggests that unit-level profitability was weak as well. Papa John’s in the aftermath spent millions trying to keep more franchisees from closing their doors.
What’s more, for a company that had generated consistent sales growth in the post-recession era, it hadn’t actually translated into rapid unit growth even though Papa John’s is the smallest of the four largest pizza chains—including Domino’s, Pizza Hut and Little Caesars.
Between 2009 and 2019, Papa John’s had an average annual unit growth of 1.2%, according to data from Restaurant Business sister company Technomic. Only Pizza Hut (-0.3%) was worse.
By comparison, the much larger Domino’s had 2.2% growth. Little Caesars had 2,665 U.S. locations in 2009, fewer than the 2,781 locations Papa John’s had at the time.
Little Caesars now has 4,237 U.S. locations, averaging 4.7% growth per year. Papa John’s has 3,142.
If we ignore the past three years’ worth of unit changes, the numbers still don’t look good: Little Caesars in 2016 operated 4,323 U.S. locations, compared with 3,331 for Papa John’s. Under Schnatter’s watch, the smaller Little Caesars overtook his chain and then put a considerable distance between the two. If Papa John’s was such a strong, profitable brand, why didn’t franchisees build more locations?
Sure, Papa John’s has struggled since Schnatter left. But rightly or wrongly, the sales declines after the NFL comments hit the company like a brick. Yet it’s clear based on the numbers that sales were stumbling as it was. The post-2017 sales shock revealed a weak foundation in the form of low profit, low sales restaurants. That was the company Schnatter built.