Papa John’s Earnings Might Save Shareholders

Print Email

Papa John’s International Inc. (NASDAQ: PZZA) shares have not recovered since its founder was pushed out for making racially charged comments. As a matter of fact, the drop has steepened and the stock is down 17% over the past month, and it shows no signs of recovery. Shareholders continue to be pinned down by the battle between the Papa John’s board and John Schnatter. Second-quarter earnings may change the stock’s direction.

Most recently, Schnatter said he has lost confidence in management. That mirrors the company’s comments that it has lost confidence in him. The friction has set off a series of moves that Schnatter hopes will restore him as chief executive. Since the board has made it clear that won’t happen, legal challenges, back and forth, could last for months. During that time, no sane investor would consider buying shares, unless the investor was prepared to speculate that the war soon will end peacefully, balanced against the possibility that it may get worse.

Papa John’s shares have been cut nearly in half over the past year.¬†Schnatter’s actions continue to be one part of that. Wretched results make up for the rest. Combined, the two problems have caused a sell-off that has taken shares down 45% from a year ago.

The only chance shareholders might get some relief is that Papa John’s announces second-quarter results on August 7. If the numbers are as bad as in the first quarter, shares may be pushed down even more. If they are reasonable, management can make the argument that the issues surrounding¬†Schnatter are only a sideshow. In the first quarter, revenue fell 5% to $427 million, while net income dropped 41% to $17 million.

In the first quarter, management’s comments about the rest of the year could not have been briefer:

The company is reaffirming its previously issued 2018 outlook, as we expect our initiatives will result in improved sales and operating results in the last half of the year.

Presumably, reasonable results in the latest quarter would show that improved sales have come early, based on the company’s timetable. Or management could offer more detail about why it believes the second half will be better. Either would be a cause for hope that the founder will not continue to ruin any opportunity for the stock to head north again.