Papa John's Hits Lowest Level Since 2014 as Founder Knocks CEO

(Bloomberg) -- John Schnatter thinks he’s the solution to Papa John’s International Inc.’s sales slump. The company thinks he’s the problem. No matter who’s right, investors aren’t happy.

The pizza chain, where Schnatter resigned as chairman last month after using a racial slur, reported comparable sales in North America that fell 6.1 percent in the latest quarter, worse than analysts had predicted. While the company continues to distance itself from its outspoken founder and largest shareholder, Schnatter blames the results on that fact that he’s no longer in charge.

Shares fell as much as 7.4 percent on Wednesday, hitting the lowest intraday level in nearly four years.

“History shows that the company performs better with me involved, and it declines when I step away,” Schnatter said in a blistering statement following the release of quarterly results. “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.”

The pizza chain says Schnatter’s behavior is weighing down performance, especially since news broke in mid-July that he’d used the offensive language. North American same-store sales fell 10.5 percent last month, after the latest quarter ended, Papa John’s said in a filing Tuesday. The poor sales prompted the company to cut its profit forecast for the year. It has started removing Schnatter’s image from pizza boxes, and asked him to cease media appearances on behalf of the chain.

“John Schnatter’s comments are an attempt to distract from his own words and actions,” a company spokeswoman said late Tuesday. “We have received strong support from our stakeholders for the actions underway, including the decision to remove Mr. Schnatter from the brand. We remain focused on the important work underway to move the company forward. We are confident that we can.”

‘Significant Costs’

Due to the recent negative publicity, Papa John’s will incur “significant costs” for remodeling, a new ad campaign, a company audit and legal costs, the chain said in its earnings statement. It’s also giving financial assistance to franchisees who’ve been hurt by Schnatter’s statements “to mitigate closings,” it said. It estimated those total costs at between $30 million and $50 million for the remainder of the year.

“Near term, it’s bad,” said Bloomberg Intelligence analyst Michael Halen. “Who knows if this is the management team to be able to turn it around. This business is attractive; I would think it would be attractive to a private-equity buyer who could turn it around outside of the public eye.”

A company spokeswoman declined to comment on such an option.

Biggest Shareholder

Schnatter handed the chief executive officer reins to Steve Ritchie in January following criticism after he lashed out at the NFL for its handling of protests by players against inequality and police brutality. He then exited the chairman post last month after using a racial slur on a call with a media agency. While Schnatter has since apologized for his racist statements and said his language was taken out of context, the company is distancing itself from its outspoken former leader.

Still, Schnatter is on the board of directors and owns about 29 percent of the stock. He’s been urging investors to seek new leaders at Papa John’s.

“Results under my leadership demonstrate that I know what works and what doesn’t work for this company,” Schnatter said. “I have little doubt that the company’s financial performance will continue to deteriorate under the current CEO and board of directors.”

--With assistance from Karen Lin.

To contact the reporters on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net;Craig Giammona in New York at cgiammona@bloomberg.net

To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, Lisa Wolfson, Cecile Daurat

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