Takeaways from Papa John's awwwwkward earnings report

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Papa John's
Papa John's Credit: Luke Sharrett/Bloomberg

We knew Papa John's results would be ugly. We didn't know they'd be this ugly.

"As you know, recent weeks have been challenging," President and CEO Steve Ritchie said as he kicked off the call, in what might be the corporate understatement of the year.

The beleaguered pizza chain posted dismal second-quarter results and issued a bleaker forecast for the year. Meanwhile, founder John Schnatter tried to put his own spin on Papa John's poor performance, saying history shows that it does better when he's involved and declines when he steps away.

And yet. Papa John's current executives point to data showing sales got worse right after Schnatter, back in November, said the NFL didn't do a good job of handling players' national anthem protests. The sales decline became even steeper after Schnatter's use of the n-word and other racial slurs on a May conference call in May with Laundry Service, the chain's creative agency at the time, came out in a July 11 Forbes article. Still, Schnatter, who admits to making those comments, says the company does better when he's there.

Let's continue.

Papa John's says North American same-store sales -- a key measure of the company's performance -- fell 10.5 percent in July, after falling a steeper-than-anticipated 6.1 percent in the second quarter. The company now projects such sales will plunge 7 to 10 percent this year. As recently as early May, it was predicting such sales would be down 3 percent in the worst of times and flat if all went well enough. International same-store sales are also expected to be weaker than its prior forecast. And it's going to spend $30 million to $50 million on a variety of plans.

Papa John's: Change in Comparable Sales & Adjusted EPS - issued by founder John Schnatter
Papa John's: Change in Comparable Sales & Adjusted EPS - issued by founder John Schnatter Credit: Graphic: Business Wire

Schnatter, in a separate statement, said the company's results "further exemplify" his concerns over the leadership of Ritchie (who took over as CEO from Schnatter at the start of the year) and the board of directors. And Schnatter, who remains its largest shareholder, even issued his own financial chart.

Back to the company itself. Papa John's CEO Steve Ritchie's comments included zingers like this: "We are not dependent, nor should we be, on one person." And of course, the images of that one person it depended on for so long are hastily being wiped from marketing materials such as pizza boxes and logos.

At another point, Ritchie called Schnatter's comments "very inexcusable and irresponsible."

Papa John's has hired new agencies -- Endeavor Global Marketing on creative and Weber Shandwick's Powell Tate on PR, to help it try to mitigate the situation. And it hired Nimbus in June as its first multicultural agency, Papa John's said Tuesday.

Putting aside things the company is working on -- including changing pricing after doing a study at every one of its U.S. restaurants, a third-party audit of company culture, possible discussions with lenders, its possible financial assistance for franchisees, such as short-term reductions in royalty payments, to keep them from shutting down, and its partnership with DoorDash to expand delivery to zones restaurants don't cover -- there's a lot to be done to fix the brand. And Ritchie used two of the industry's buzzwords, saying the brand needs to do better to reach, that's right, millennials and Gen Z.

"We have to be more than a product and an experience to be relevant to the consumers we have lost and the consumers who simply felt we weren't for them," Ritchie said on the call.

He also said that Papa John's wants to be "a purpose-driven company," which sounds an awful lot like another restaurant chain trying to move past its own bad news: Chipotle Mexican Grill, which recently touted its desire to become a "purpose-driven lifestyle brand."

For Papa John's, value also really matters, with pizza chains seemingly constantly offering some price-focused deal or another pretty much all of the time. A $12.99 bundle didn't help sales much in the second quarter. Lately, Papa John's has been promoting $6.99 medium meat pizzas, including a new BBQ meat variety, after hawking two one-topping large pizzas for $7.77 each.

Even when Endeavor's new ads do hit the market in the fourth quarter, Ritchie says value messaging is going to be needed. "Accessible value does have an important role to play," he said.

Papa John's is still searching for the right candidate to be its next CMO. For now, Ritchie is overseeing marketing, as he has been since the May departure of short-tenured CMO Brandon Rhoten. Ritchie says there have been a number of external and internal candidates for the role.

"Sometimes the greatest opportunities happen in the most inopportune times. I couldn't be more excited than I ever have been in my 22 years with the Papa John's brand to flip the switch and look forward, not be distracted by the words and comments of one individual, but look forward to move this brand forward," Ritchie said at the end of the call. "We have a complete, unified Papa John's family, both internal and external, that is behind the vision and the mission to move this brand forward."

Shares of Papa John's fell 10.5 percent to $36.75 in after-hours trading following its report and the statement from Schnatter.

Lastly, we'd be remiss if we didn't point out some slides Adweek reported came from work Schnatter and the company's marketing team -- back when they were getting along -- did with former creative agency Zimmerman to combat the first reports of racist talk.

It's been a heck of a week in the weird world of Papa John's. And it's only Tuesday.

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