Papa John's Earnings: It Has Much Bigger Problems Than the NFL

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(Bloomberg) -- Last year, John Schnatter got his pizza empire, Papa John's International Inc., in the headlines for all the wrong reasons.

Comparable sales growth had slowed in North America. And instead of simply pledging to step up the restaurant's game, the Papa John's founder and CEO at the time pointed a finger at the NFL.

The chain was a league sponsor, and Schnatter bitterly blamed the controversy about players kneeling during the national anthem for his company’s troubles and accused the organization of "poor leadership."

I suspect that flap left investors plenty glad to see Schnatter step down as CEO on Jan. 1. But the restaurant's latest quarterly earnings make clear that getting rid of Schnatter didn't rid Papa John's of its problems.

The company reported on Tuesday that comparable sales fell 5.3 percent from a year earlier in its North American business. Executives had said earlier that the first quarter would be a rough one and that investors should expect improvement in the second half of the year.

But the weak performance nevertheless underscores how hard it's going to be for the new CEO, Steve Ritchie, to deliver a turnaround.

I'll admit that I'm skeptical about just how much the dust-up about the anthem has weighed on Papa John's sales. After all, its comparable sales growth had started cooling off long before the debate reached its fever pitch last fall. Plus, Ritchie has acknowledged the chain is grappling with other problems, including marketing that is "predictable and lacks differentiation" and a menu that could use more variety.  

I also haven't heard any complaints on earnings calls from NFL sponsors such as Campbell Soup Co. or PepsiCo Inc. that their relationship with the league appears to have taken a toll on sales.

In other words, Papa John's problems appear to be much bigger than getting swept up in a spasm of social and political outrage.

And, unfortunately, even if Papa John’s succeeds at sharpening its advertising and improving its unit-level operations, it won't be easy for it to gain ground.

The market-share leaders, after all, are not giving it much of an opening.

Domino's Pizza Inc. has been on one of the most impressive hot streaks in the entire retail industry, consistently recording blockbuster same-store sales growth that is powered by its prowess in digital ordering. Pizza Hut, owned by Yum Brands Inc., has been working to transform itself into more of a delivery powerhouse, and there are hints it is working.

And the food-delivery business is being transformed in ways I'm not convinced Ritchie fully grasps. In November, when Ritchie was still chief operating officer, an analyst asked him during an earnings conference call about the threat of third-party delivery businesses such as GrubHub Inc. or Uber Eats.

Ritchie replied there's "potential for that to have a small impact" and added that Papa John's was looking at potential partnership opportunities with these delivery aggregators.

That seems awfully shortsighted. Papa John's should be looking at the rise of these services as a serious threat. GrubHub, for example, had 15.1 million active customers in the latest quarter.

These third-party services have broadened customers’ choices for food delivery. Because of these apps, Papa John's now faces a much wider array of direct competitors, from McDonald's Corp. to upscale, chef-driven indie restaurants. That dynamic may not have a material impact on Papa John's sales now, but it almost certainly will as these services gain customers and as more restaurants participate in them.

Stuck between competitors both traditional and upstart, Papa John's is going to find little room to break out of its slump.

©2018 Bloomberg L.P.

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