LOUISVILLE – There is such a thing as bad publicity, at least in the case of Papa John’s International Inc. The company missed multiple earnings targets for the second quarter and lowered its financial outlook.
Comparable sales at domestic company-owned restaurants dropped 7.2 percent in the three months ended July 1, 2018, compared with 2.3 percent growth in the year-ago period. At North America franchised restaurants, comparable sales fell 5.7 percent, while system-wide comparable sales at international restaurants declined 0.8 percent.
“Earlier this year, we began implementing key changes in how we operate and market our products to refocus on quality and better connect with customers,” said Steve Ritchie, president and CEO of Papa John’s. “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. Our entire leadership team understands the importance of getting our culture and business improvements right. We have important work ahead of us, and I feel certain that with the collective efforts of our 120,000 corporate and franchise team members that the best days for Papa John’s are ahead.”
For the second quarter ended July 1, total revenues were $407,959,000, down 6.2 percent from $434,778,000 reported in the second quarter of 2017. Net income for the period dropped 49.9 percent to $11,791,000, or $0.36 per diluted share, compared with $23,538,000, or $0.65 per diluted share, reported in the year-ago period.
Papa John’s founder, John Schnatter, blamed the company’s poor performance on Ritchie. In a news release, Schnatter said the company’s earnings results highlighted the deterioration of Papa John’s under Ritchie’s tenure. Ritchie was promoted to CEO after Schnatter vacated the role in December 2017.
“Instead of addressing the real and fundamental issues confronting the company since that time period, and taking actions to turn sales around, the company is trying to deflect attention from the source of the problem — management’s ongoing failures with regard to financial performance – and blame me for its problems,” Schnatter said.
The company cited “recent negative publicity” surrounding the Papa John’s brand as driving a 10.5 percent decline in North America comparable sales for July.
“At this time, the company cannot predict how long and the extent to which the negative customer sentiment will continue to impact future sales,” the company said. “In addition, the company expects to incur significant costs as a result of the recent negative publicity…”
The company expects to incur significant costs in the range of $30 million to $50 million as executives work to rehabilitate the company’s image and internal culture. The list of initiatives includes:
- re-imaging costs at nearly all domestic and international restaurants,
- costs to accelerate our replacement of certain branded assets and related marketing efforts,
- financial assistance to domestic franchisees, such as short-term royalty reductions, in an effort to mitigate closings,
- additional costs for branding initiatives, including but not limited to, launching a new advertising and marketing campaign and promotional activities to mitigate negative consumer sentiment and negative sales trends,
- costs associated with a third-party audit of the culture at Papa John’s commissioned by the special committee as well as costs associated with implementing new policies and procedures to address any findings as a result of the audit, and
- additional legal and advisory costs, including costs associated with the activities of the Special Committee.
Papa John’s also lowered its financial guidance, saying the company expects North America comparable sales to fall 7.0 percent to 10.0 percent. Previous guidance pegged North America comparable sales as flat to lower by 3 percent.
Adjusted diluted earnings per share guidance was lowered to $1.30 to $1.80 from $2.40 to $2.60.
