Papa John’s has a simple message for customers: “You expected better from Papa John’s. So did we,” the company said in a video posted to social media. This was the first advertisement campaign for the pizza brand since founder John Schnatter exited July 11 as executive chairman. Schnatter has hardly stepped away quietly, though, even launching a website last week to drum up support for his efforts to take back control of the company. Schnatter published a letter in the Louisville Courier Journal saying, “Papa John’s is our life’s work and we will all get through this together somehow, some way. I can only imagine how difficult this entire situation is on you, and I’m very sorry you all have to go through this.”
In addition to the campaign, which featured comments from customers voicing their disappointment in the brand, CEO Steve Ritchie penned an open letter to employees, franchisees, and customers outlining some of Papa John’s efforts to correct what’s been a troubling course in recent months, especially in regards to sales trends. The brand’s North America same-store sales dropped 6.1 percent in the second quarter that ended July 1. But those numbers didn’t even reflect the latest flare-up. The issue surfaced in July, however, as comps in the region decreased about 10.5 percent from July 2 to July 29. In response, the company ballooned its outlook for the fiscal year from negative 3 percent to negative 7–10 percent.
Ritchie said in the letter that Papa John’s leadership team recently completed “unconscious bias training,” and plans to roll out the program across the country.
An independent cultural audit and investigation of its diversity and inclusion practices is also underway, “with actionable recommendations to follow.”
Ritchie added that, along with other Papa John’s leaders, he visited Atlanta, Los Angels, Dallas, Detroit, and Chicago as part of a listening tour to get feedback from team members and franchisees “on how we can do better.”
Papa John’s is assembling a special advisory group comprised of nationally respected diversity, equity, and inclusion experts to help guide the brand, Ritchie said. Additionally, he said he is “personally committed to adding more diversity to the leadership team of Papa John’s.”
The pizza chain is kicking off the development of two long-term initiatives as well:
- The Papa John’s minority-owned franchise expansion and development program.
- The formation of a new foundation that will be focused on making a positive impact in communities where employees live and work. “We will support causes that bring people together,” Ritchie said.
“I started my career in the pizza business 25 years ago because pizza brings people together,” Ritchie said. “I found a home at Papa John’s where people from all backgrounds work side-by-side every day. Papa John’s is 120,000 corporate and franchise team members around the world. We stand for equity, fairness, respect and opportunity. Our most important ingredient is our people.”
“When I became CEO in January, diversity, equity, and inclusion became one of my top priorities. What began as a committee of passionate team members has grown into a company-wide effort to realize our values,” he added.
Ritchie added more the following day on social media. "I've been listening along with my team members. I’ve heard their hurt, disappointment and anger, and that of our franchisees, our customers—and those who used to be," he said. "And now we’re all looking inwards, reclaiming the responsibilities Papa John’s has to our partners, customers and communities. In thinking about what we want the Papa John’s name to stand for moving forward, we’re now going where we should have been all along."
He added: "... we'll be forming a new foundation which will focus on supporting organizations that are working to eradicate the biases that keep us apart, while also supporting and celebrating those that bring us together; and that we’ll be creating a franchise expansion and development program for women and minorities—are only a start. But please hold us accountable to these words and commitments. Hold me accountable to them."
Schnatter responded to the social media campaign, with a spokesperson saying the company omitted customer comments that voiced support for him, per The Wall Street Journal.
In addition, Papa John’s said it retained Bank of America Corp. and Lazard Ltd. to provide advice on business operations, according to the WSJ. The source said there are no sale talks in the works. The new sent Papa John’s shares up about 5 percent August 24, but they remain 42 percent below their year-ago level.
How long could a recovery take? Margins should improve once Papa John’s moves through some of the initiatives it has planned, including a franchisee assistance program for U.S. and Canadian operators. But it won't be a quick fix by any means. According to the WSJ, analysts expect domestic comps to decline 10.3 percent in the current quarter, year-over-year, and to increase by 0.3 percent in the year that follows.
“That amounts to a forecast that none of the customers the pizza chain has lost will come back,” the publication wrote.
FactSet is showing Papa John’s trades at 29 times expected earnings, a high ratio that reflects just how weak analysts believe its earnings will report over the coming quarters.
“People are at the heart of our business, and this program is one of many actions we are taking to prioritize our team, address the recent challenges and move Papa John’s forward,” Ritchie said of the franchisee assistance program. This includes certain reductions in royalties, foodservice pricing and online fees through 2018. In addition, funds will be provided to support new marketing and re-imaging initiatives consistent with the company’s new brand direction.
Papa John’s is also targeting the fourth quarter to aggressively roll out a new advertising and marketing campaign. It tapped Hollywood powerhouse Endeavor Global Marketing as its new ad agency and promoted Victoria Russell to a newly created role of Chief of Diversity and Inclusion. Papa John’s also hired Nimbus in June as its first multicultural agency.
Papa John’s said last quarter its efforts to turnaround sales could include a “number of store closures in the U.S.,” but that it was doing everything it could to mitigate the closures and was forecasting more than 350 global openings for the year, mostly in international markets.
“Our work to drive new branding and marketing campaigns that differentiate Papa John's and refocus us on our value proposition is more important now than ever as we try to reestablish trust with our customers,” Ritchie said, adding that millennial and Gen Z customers are especially important in this goal.
Papa John’s has reported negative comps for three straight quarters:
- Q4 2017: -3.9 percent
- Q1 2018: -5.3 percent
- Q2 2018: -6.1 percent
Ritchie credited the downturn to last November’s NFL comments by Schnatter that credited anthem protests for declining sales and criticized NFL leadership. Ritchie said Papa John’s was showing 1.1 percent positive sales in Q3 2017, and directly after the November controversial conference call, “we saw a very sharp decline.” That quarter ended up negative 3.9 percent and sales have hovered between negative 5–6 ever since.” This ramped up, Ritchie said, in the wake of a report Schnatter used a racial slur during a May conference call between executives and the company’s then-marketing agency Laundry Service, Ritchie said comps declined 6.1 percent to start Q3. Once the news hit, he said, the company witnessed "another precipitous drop of roughly 4 percent" due to the "very inexcusable and irresponsible comments from Mr. Schnatter."
Since, Papa John’s has evicted Schnatter, who still owns about 29 percent of its shares, from the company’s corporate offices and removed him from its marketing. But he has continued to make headlines, including saying he was suing the company in July for documents that could, Schnatter said, show if Papa John’s board “planned this coup in advance,” and if they truly acted without adequate information, as he has suggested in the past. It will help Schnatter discover, the claim said, if directors were “grossly negligent or are acting in bad faith, or both.”
Papa John’s announced a so-called “poison pill” last month as well in a preemptive move to dissuade any attempt at a hostile takeover. The shareholder rights plan is meant to “protect the interests of the company and its stockholders by reducing the likelihood that any person or group gains control of Papa John’s through open market accumulation or other tactics without paying an appropriate control premium.” It lays out conditions that will dilute the value of Papa John’s stocks should any party attempt to acquire 15 percent or more of common shares. Such an action would open the door for shareholders to purchase additional stocks at a discount, thus decreasing each individual share’s value. Schnatter and his affiliates own 30 percent of the shares in the namesake brand and are therefore grandfathered into the stockholder rights plan. If Schnatter’s shares bump up to 31 percent or greater, he forfeits that exemption.