Papa John's Takes a Well-Deserved Whack to Share Price

When pizza store chain Papa John’s International Inc. (NASDAQ: PZZA) reported earnings after markets closed Tuesday, the company missed revenue and profit estimates and investors quickly bailed on the stock. Shares traded down more than 10% in Wednesday’s premarket session.

The blame is being laid at the feet of the founder and former chair/CEO, John Schnatter, who was forced out after allegations last month that he used racial slurs and made other violent comments in a conference call with a company marketing agency in May. Schnatter later whined to a Louisville radio station that he was “pushed” into using the racist language.

After his comments last December, a first gripe about how NFL players kneeling for the national anthem was costing him sales, the company’s board should have expected something more, and Schnatter delivered in May.

The company’s board did replace Schnatter as CEO but allowed him to remain as executive board chair. That decision has cost Papa John’s shareholders 28% in share value since the beginning of the year, more than half of which came after the July allegations, and if premarket trading is any indication, that loss is going to grow significantly once the opening bell rings. As a reward for outstanding leadership, Papa John’s board elevated lead independent director, Olivia F. Kirtley, to be its chair.

In its second-quarter earnings report, new CEO Steve Ritchie said:

While results have been challenged by recent events, we are committed to these strategic priorities and continue to believe that they will lead to enhanced performance. We have also begun an external audit of Papa John’s culture and will address any improvements that are recommended at its conclusion.

“Any improvements?” Is this guy serious? Does every bigwig at Papa John’s have a tin ear? Or are they all just plain deaf? Or is it something else?

The company lowered its full-year guidance “based on consumer sentiment and the expected impact on future sales.” In other words, Papa John’s knows it’s taken a serious hit, but it has no idea whether it can control the damage.

Marketing experts expected that the damage would be over by now, but that hasn’t happened, and Papa John’s has Schnatter and its own board of directors to thank for that. The company has no idea how much it will cost to control the damage done by Schnatter, who has said he regrets resigning and is going to take the fight for control of the company in the courts.

That should keep Papa John’s name in the headlines — for all the wrong reasons. Perhaps it’s what the board and management deserve, and the investors who are already losing a ton of money may speed up the process by selling off their shares even faster.

Shares closed down nearly 3% Tuesday, at $41.07 in a 52-week trading range of $40.65 to $80.80. The stock traded down about 9.7% in Wednesday’s premarket to $37.10, well under the existing low. The stock’s 12-month consensus price target is $56.60, but that was before last night’s report. It is sure to drop as analysts rev up their models this morning.

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