This post has been updated.
As expected, Papa John’s took a significant hit to its sales during the third quarter, but President and CEO Steve Ritchie told analysts Tuesday that the Louisville pizza chain is “seeing early indications” of a turnaround.
Ritchie stated that, according to a recent survey, consumer sentiment is shifting toward neutral and positive after a jump in negative sentiment following reports of founder John Schnatter using a racial slur.
“Progress is being made … but we still face challenges and know more work needs to be done,” said Ritchie, who cited the company’s diversity and inclusion training for its employees and a $10 million investment in marketing to help franchisees weather the decline.
“We are taking the right steps to take the brand in the right direction,” he said later.
During the third quarter of 2018, Papa John’s net income plunged nearly 160 percent, with a loss of $13 million, and its revenue dropped just under 16 percent, to $364 million, according to its earnings report released Tuesday.
Same-store sales in North American declined 9.8 percent overall during the third quarter, which was slightly better than anticipated. Analysts expected same-store sales to drop more than 10 percent for the quarter. Papa John’s revised its previous same-store sales estimates for North America in 2018; the company now anticipates them to drop between 6.5 percent to 8.5 percent, compared to the prior estimate of 7 percent to 10 percent.
Papa John’s also narrowed its year-end earnings per share outlook to $1.30 to $1.60 after reporting a 168 percent decline in diluted earnings per share, a loss of $0.41, during the third quarter.
“During the quarter, we took important actions resulting in improved consumer sentiment and North America comp sales that were slightly ahead of expectations. While the operating environment remains challenging, these early indicators combined with our strong cash flow give us confidence in the consumer initiatives underway across the Company,” Steve Ritchie said in a news release.
The release cited decreases in royalties and commissary sales (a side effect of poor same-store sales), declines in revenue related to the re-franchising of some stores and the temporary reduction in royalty rates as part of a franchises assistance program as reasons for its poor performance. The assistance program was announced in August to help ease the negative impact of the company’s fallout with founder John Schnatter over his behavior.
The company is still decided how much support it will provide to franchisees in 2019, Ritchie said, adding that an announcement is likely following its fourth-quarter earnings release early next year.
The company’s shares declined Tuesday afternoon ahead of the release of its third-quarter earnings after the market closed. The company ended the day down almost 2 percent, to $53.47.
Before the earnings call Tuesday, Stifel analyst Chris O’Cull told CNBC that he’s skeptical that Papa John’s could find a buyer, considering the chain’s poor sales and an ongoing legal fight with Schnatter. Reuters has identified private equity firms KKR & Co. and Roark Capital as two potential suitors, and hedge fund Trian Fund Management, which owns a stake in Wendy’s, has been named in media reports as well.
Jefferies analyst Alexander Slagle said in September that a private equity firm would be the most likely buyer but agreed that “negative headlines/sentiment” could sour a potential deal, according to a previous Insider report.
The company does, however, seem to be gearing up for a possible acquisition, having amended its severance packages for top executives in the event of a change in control of Papa John’s. The updated package, for instance, would give Ritchie three years worth of his base salary and prorated incentives if he is let go without reason following a control change.