The One Thing We Didn't Want Papa John's to Slice

In this segment of the MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker talk pizza. Papa John's (PZZA 0.66%) turned in a perfectly good third-quarter report, but the market doesn't care about the last batch of deliveries -- it cares about the next one and when you forecast lower sales and earnings. Apparently, it wants to pin the blame not on a competitor or the economy but on one of its big advertising partners: the NFL.

A full transcript follows the video.

This video was recorded on Nov. 1, 2017.

Chris Hill: Papa John's, third quarter results were fine, but they are largely irrelevant because the pizza chain is cutting guidance on sales and earnings. The stock down almost 10% this morning, hitting a 52-week low. They appear to be placing the blame squarely and entirely at the feet of the NFL.

Bill Barker: Who isn't? [laughs] Who isn't blaming the NFL for their problems these days?

Hill: Domino's Pizza, just to name one. I get that this is the official pizza company of the NFL, and ratings for the NFL are, at various points, depending on the matchup, are a little bit lower than last year, I don't know. This line of reasoning from management is pretty suspect, in my opinion.

Barker: You have to be careful where you're advertising, don't you? It seemed like the NFL was a lock.

Hill: Yes, it did. But to go back to Domino's Pizza, last time I checked, they also do some advertising around the NFL and professional football games and sports in general, and their stock year to date is running around 40% ahead of Papa John's. So, when your profit margins are falling, when your sales growth is slowing, and that's the case with Papa John's, it's not all due to the NFL.

Barker: No. Alright, let's take one step back. Is Papa John's generally doing things right or not? Over the last three, five, 10, 15 years, this has been a market crushing stock. So, let's remember. If this is a one-year thing, let's not take them too much while they're momentarily down. That said, they're down today in part because of this NFL thing, but you can just move your advertising dollars somewhere else if that is the entirety of the issue. They're bringing down their guidance fairly substantially for next year over what people had been expecting going into today. So, that's one of those things where, when you start replacing comps of 5% with comps of 1%, which is what I think they did for the quarter, you start getting very different numbers as you multiply things out over a five to 10-year period. And that's the biggest problem, I think.

Hill: I think you're right. That's the biggest problem. Which is why I find it curious that the company spent part of their conference call talking about the NFL, and saying, we're really disappointed in leadership of the NFL because they should have resolved this issue with the national anthem protests, and all that sort of thing. So, it's like, your entire business hinges on several Sundays in the fall? OK. [laughs]

Barker: For this quarter, the guidance they're giving for the quarter we're now in, if that was a huge part of their ad spend, that they bet on the wrong horse, and probably have felt pretty good traditionally about betting on the NFL and paying up for that. You haven't been watching any of this exciting round of baseball playoffs, I take it?

Hill: Not really, no.

Barker: You're still sulking.

Hill: I'm not sulking. As exciting as the World Series is, I haven't been watching.

Barker: Since when?

Hill: Since when?

Barker: Since the Red Sox lost? That's when you stopped caring about baseball this year. And I say, that's because you're sulking.

Hill: [laughs] Uh.

Barker: Nice comeback.

Hill: No, I'm just tired. [laughs] Like our listeners, I'm just tired of you. But, by all means, go on.

Barker: So, baseball, these playoffs have been brought to you in large part by Camping World, which is just on fire, seems to have timed their ad buy very well, because the RV market is on fire. If you go to Elkhart, Indiana --

Hill: Home. Ground zero.

Barker: Home of the Hall of Fame, and go to the meetings they had out there recently, you'll find out that the RV manufacturers are telling investors that they can't build them fast enough right now. So, Camping World is the main sponsor, was the main sponsor for the League Championship Series and the AL Championship Series, and also prominently featured in the World Series. And I would expect them to have pretty good numbers, again, as they have had since their IPO, and all the RV manufacturers, actually. But, the opposite is the case for NFL manufacturers. That's a cyclical thing. Papa John's can just throw its ad buys at the NHL or NBA or wherever else the eyeballs happen to be.

Hill: We have the Winter Olympics coming up. Plenty of opportunity there. I'm sure the people at Comcast, NBC would love to sell Papa John's some ad space.

Barker: Pizza goes very well with the Olympics.

Hill: Pizza goes well with pretty much everything.

Barker: Exactly.

Hill: I actually like Papa John's pizza, more so than Domino's. But, the management whining about the NFL ...

Barker: You're just not having it.

Hill: I'm not having it.