Papa John's Just Went From Bad to Worse
(Bloomberg Opinion) -- Now arriving at Papa John's doorstep: more problems.
The beleaguered pizza chain reported results for its latest quarter on Tuesday afternoon, revealing once again just how much it’s fallen behind its competition. It recorded a 6.1 percent decrease in comparable sales in its North America business from a year earlier, its third consecutive quarter of declines on this measure and a stumble that comes as Domino's Pizza Inc. continues to notch robust growth with the help of a technology-centric strategy.
But here's the really troublesome part: These lousy results are for the quarter ended July 1, meaning they don't even reflect the latest chapter in the John Schnatter saga, in which the brand's founder was forced to resign as chairman after he used a racial slur during a business phone call. The incident stayed in the headlines for days as Schnatter attempted to explain himself in interviews and as the board asked him to stop publicly talking about the brand and scrubbed him from its marketing materials.
The company made clear Tuesday that episode has left a mark. Papa John’s International Inc. slashed its comparable-sales and adjusted-earnings guidance for the year based on “negative consumer sentiment” and said it can’t predict how long the issue will weigh on sales. It expects to incur costs to deal with the fallout, including re-imaging nearly all of its restaurants and launching new marketing campaigns and promotions.
I’ll admit being surprised by just how grisly Papa John’s expects things to get. It’s now guiding for an annual comparable sales decline in North America in the range of 7 percent to 10 percent, sharply lower than the 3 percent to flat it had outlined earlier. But I’m not surprised that it hasn’t been able to quickly shrug off the Schnatter scandal.
Schnatter, “Papa John” himself, was truly the face of the brand. Customers are familiar with him in a way they simply don't know other exiled retail executives. I suspect few shoppers even know the names of ex-Lululemon Athletica Inc. CEO Laurent Potdevin, who resigned this year over his conduct, or ex-Barnes & Noble Inc. CEO Demos Parneros, who was fired in July for unspecified policy violations.
The Papa John’s story has had a much longer shelf life than it ought to have had, because Schnatter — who still owns about 29 percent of the company — refuses to go quietly. He has sued Papa John's for documents related to his departure, and he slammed the company in a statement Tuesday afternoon for the poor results, Bloomberg News reported. Both are signs that this soap opera is far from over.
Plus, don’t underestimate how damaging it could be for Papa John’s now that its senior leadership has to divert attention to cleaning up this mess instead of focusing on its more prosaic problems.
CEO Steve Ritchie, in particular, is stretched thin right now. Papa John's recently lost its chief marketing officer, Brandon Rhoten, after roughly a year in the job, and the marketing team has reported to Ritchie on an interim basis as he looks for a replacement. Steering this department is an especially demanding job right now, given that better marketing is a core component of Ritchie's comeback plan. The company, he says, needs to do a better job of reminding customers of the quality of its ingredients and must convince diners Papa John's is a good value for the price.
It can't be easy to drive that effort while also doing things like traveling to its stores and holding listening sessions with employees about the corporate culture and inclusion as part of the Schnatter debacle.
Papa John's was never going to have an easy time of perking up its sales. It had perhaps become too reliant on its former NFL partnership, and as I've noted before, its menu could use a fine-tuning. Plus, the restaurant industry is in the early innings of a massive shift toward digital-enabled delivery, and it's not clear Papa John's has a sound strategy for holding its ground.
But its path forward now looks even less certain — other than that it’s likely to be downhill for a while.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
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