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The Pain Isn't Over for Papa John's International

Jamal Carnette, CFA, The Motley Fool

The maxim "when it rains, it pours" is particularly apt for Papa John's International (NASDAQ: PZZA) shareholders. The share price has nearly been halved in the last year, as a series of missteps -- both business and PR-related -- have sent the stock reeling.

The latest impetus for the Papa John's stock sell-off was the company's second-quarter earnings report. The country's third-largest pizza maker missed analyst estimates on the top and bottom lines by 3.8% and 9.2%, respectively, reporting $408 million in revenue and adjusted earnings per share of $0.48. Investors were particularly spooked about a 6.1% decrease in Papa John's closely-watched North American comparable-store sales metric.

Things could get worse before they get better.

Man sitting at a desktop computer, looking frustrated

Image source: Getty Images.

No longer the official pizza of the NFL

As Papa John's enters the third quarter of 2018, it's important to note that last year's third-quarter earnings report started the stock's sell-off. During the conference call, founder and then-CEO John Schnatter blamed the NFL's "poor leadership" for his company's disappointing 1% comparable-sales increase in North America.

Despite Papa John's strong connection with the NFL as its "official pizza," investors were not convinced, especially when Yum! Brands' CEO noted during that company's earnings call that the NFL wasn't a factor in Pizza Hut sales. Papa John's stock plunged nearly 12% before Schnatter apologized.

Papa John's and the NFL dissolved their long-standing national sponsorship deal after the season, with Pizza Hut signing on as the official partner soon thereafter.

Tough comps next quarter

Although Schnatter blamed the NFL for sluggish sales during the third quarter of 2017, the long-term trend has North American same-store sales growth slowing. It's possible that the start of the 2017 NFL season helped the company on this metric, as the slowdown in North American comps (5.5% to 1%) was less than in any other recent year-over-year period:

Papa John's North American comparable sales by quarter, from Q3 2016 to Q2 2018

Data source: Papa John's. Chart by author.

Look for this trend to get worse before it gets better. In addition to the established trend of falling comparable-store sales, Papa John's must now compete with last year's third quarter, when it benefited from nationwide NFL-related marketing.

Schnatter may have been disappointed in the NFL's leadership, but it's likely that the partnership was lucrative, helping the company sell millions of pizzas it would not have otherwise. Although Papa John's retains marketing deals with individual teams, during the next two or three quarters, the heavily-watched same-store sales metric will be negatively impacted by the loss of the nationwide deal.

Negative headlines aren't helping

Investors are forward-looking, so under ideal conditions, the company could probably explain that comparable sales will be impacted by the NFL deal ending, with little blowback. But the situation at Papa John's is far from ideal. Investors don't even know who will eventually run this company.

Schnatter is currently locked in a bitter dispute with current management, filing a lawsuit and alleging a "coup." Former founders and CEOs taking offense at the new directions of their companies is nothing new. However, rarely has a company been so intractably linked to a warring founder: Schnatter owns a large stake (nearly 30%) in the company, remains on the board of directors, and was considered the long-term face of the brand.

As the lawsuit and negative publicity persist, investors cannot buy a turnaround story -- and negative same-store sales will continue to weigh on stock returns.

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Jamal Carnette, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.