Give Papa John's Turnaround the Benefit of the Doubt

(Bloomberg Opinion) -- Papa John’s International Inc. has been eager to put the saga you might call Schnatter-gate behind it. I’m referring, of course, to the rolling list of headline-grabbing messes in 2017 and 2018 associated with its founder, John Schnatter, including his lashing out at the National Football League over the pizza chain’s sales results, using a racial slur on a business phone call, and sparring in highly public fashion with the board over the events surrounding his departure as both CEO and chairman. 

Unfortunately, its Tuesday earnings results showed consumer sentiment about the brand hasn’t recovered from that bad publicity. Papa John’s first-quarter comparable sales fell 6.9 percent in North America from a year earlier – not quite as bad as analysts had expected, but certainly nothing to cheer about. 

My greatest reason for optimism about Papa John’s arrived in February, when Starboard Value LP made a $200 million investment in the pizza chain. As I noted at the time, Starboard is behind arguably the best turnaround story in the entire restaurant business over the last five years: Olive Garden. Papa John’s should benefit from Starboard’s strategic guidance. And it needs it: I’ve long argued that any sustained Papa John’s resurgence can’t just come from rehabbing the specific type of image damage it suffered from Schnatter’s behavior. The chain was hurting even before those issues emerged, so Papa John’s also needs to do a better job at restaurant basics.

Steve Ritchie said when he stepped into the CEO job that Papa John’s needed menu innovation, and we finally see the company pushing harder on that. In March, it introduced six new specialty pizzas such as Fiery Buffalo Chicken and Super Hawaiian. It is testing sandwiches in some markets, a sensible way to expand its menu.

Papa John’s is also back to emphasizing the quality of its ingredients in its marketing, which is probably the right move. It sure sounds better than trying to wage a race-to-the-bottom price war with Pizza Hut, which has been trumpeting $5 medium pizzas. Papa John’s recently hired a new marketing chief, Karlin Linhardt, who has experience at both Subway and McDonald’s Corp. That sounds like exactly the right background for the person in charge of further sharpening Papa John’s advertising.

I had worried previously that Ritchie didn’t quite grasp the magnitude of the threat that third-party delivery services such as Uber Eats and Grubhub Inc. presented to his and other pizza companies. But I’m somewhat less concerned about that now, after Papa John’s March announcement of a national delivery partnership with DoorDash.

Papa John’s still has a long way to go before its problems are solved. It reaffirmed its outlook on Tuesday for full-year North America comparable sales to fall between 1 percent and 5 percent. That’s a pretty gloomy view, and even that won’t be easy to achieve, given the first-quarter decline on this measure was steeper than that. Plus, with even mighty Domino’s Pizza Inc. feeling the heat of delivery platforms like Uber Eats, it won’t be easy for fragile Papa John’s to withstand that pressure.

But the chain has new talent working on its challenges. And we continue to see evidence that Schnatter is fading into the rearview mirror. A Monday, a securities filing showed that he is exploring selling shares, potentially putting even more distance between him and the company.

All of that suggests to me that a turnaround – while hardly a sure thing – isn’t nearly as hopeless as it once seemed.

Papa John's said Tuesday that Starboard had invested an additional $50 million in March.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

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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