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Papa John’s sales plunge after John Schnatter comments

The company’s founder blasted current executives and blamed CEO Steve Ritchie for its deteriorating performance.
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Papa John’s said Tuesday that it expects some restaurants to close amid steeply falling same-store sales following controversy surrounding its beleaguered founder, John Schnatter.

Yet Schnatter, who still owns 30% of Papa John’s stock, blasted company management and said that the chain’s sales problems are due to its poor performance.

Same-store sales plunged 10.5% in North America  in July, a deterioration from the 6.1% decline in the quarter ended July 1. The company’s stock fell 10% in after-hours trading Tuesday.

That has the company considering “temporary” assistance to franchisees, either in the form of royalty relief or assistance in reimaging costs, in a bid to “mitigate” closures in the coming months.

“We will do everything possible to mitigate closures,” CEO Steve Ritchie said on the company’s second quarter earnings call. The company did not predict how many locations could close, but executives said they expect the sales downturn will lead operators to shutter units. Papa John's operates 3,400 locations in North America.

But Schnatter, who was removed from the company’s marketing last month but remains the chain’s largest shareholder, said that Papa John’s performance was deteriorating long before he made any comments.

In a statement sent during the earnings call, Schnatter says that Ritchie “assumed CEO responsibilities” in mid-2016. Ritchie had been company president before he was named CEO last December following Schnatter’s resignation from that role.

“Today’s results highlight the further deterioration of Papa John’s performance under the tenure of Steve Ritchie, since he assumed CEO responsibilities in mid-2016,” Schnatter said. “Instead of addressing the real and fundamental issues confronting the company since that time period, and taking actions to turn sales around, the company is trying to deflect attention from the source of the problem—management’s ongoing failures with regard to financial performance—and blame me for its problems.”

Company executives said on the earnings call that the problems were rooted in comments made by Schnatter, the chain’s former CEO and chairman and its longtime spokesman. That included comments he made in November seeming to blame NFL player protests for Papa John’s weakening performance. And it included a racial slur made during a conference call, revealed in a Forbes article last month.

Ritchie on the call said that research and analysis following Schnatter’s comments in November indicated that he needed to be removed from the chain’s advertising and marketing. Schnatter wasn’t removed until last month, when a special committee of the company’s board of directors ended his founder’s agreement.

“We needed to move away from a founder-centric marketing plan,” Ritchie said on the call, adding that “recent events” confirmed that need. “We are not dependent on one person,” he added.

The dispute between Papa John’s and its founder exploded last month after a Forbes article revealed Schnatter’s use of the N-word during a conference call intended to help him avoid public relations problems.

Schnatter acknowledged the comments and resigned as Papa John’s chairman, but he has since said he regrets the resignation and has filed a lawsuit against the company seeking documents related to the committee’s decision.

Executives said that the company is planning an “aggressive” marketing campaign to rebuild sales in the fourth quarter in a bid to rebuild sales. The company also has a new marketing agency, Endeavor Global Marketing.

The company said that it will be difficult to fully ascertain the full impact of the events. But in addition to the decline in same-store sales, the company expects costs for reimaging, franchisee assistance and other issues will cost between $30 million and $50 million.

“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 said. But Ritchie on the earnings call said that same-store sales seem to have “stabilized” at a negative number, but he would not give out that figure.

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