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Here's Why Papa John's International, Inc. Shares Fell 11% in February

By Daniel B. Kline - Mar 9, 2018 at 12:31PM

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The company has been hurt by the actions of its founder.

Papa John's ( PZZA -0.62% ) has fallen into a trap. The company's founder and now-former CEO, John Schnatter, made the mistake of getting involved in politics.

That's generally going to be bad for most businesses as customers are likely to have diverse political views. Schnatter's condemnation of National Football League (NFL) players' national anthem protests, however, also put the company at odds with the league, bringing a sponsorship agreement to an end.

What happened

Schnatter has never been particularly quiet on social issues, but generally, he has avoided topics this polarizing. The company moved in December to contain the damage by naming its COO, Steve Ritchie, to the CEO position.

In the long run, having a different executive may help the company be less polarizing, but Schnatter still appears in ads and serves as chairman. And of course, it doesn't help that the company is named after him.

In late February, after months of rhetoric mostly from the pizza company's founder, the NFL and Papa John's parted ways. That's a blow since the NFL partnership was such a strong marketing platform -- watching football and eating pizza go hand in hand. And the damage was made worse when the league immediately found a new official sponsor in Pizza Hut, one of Papa John's chief rivals.

New Papa John's CEO Steve Ritchie

Ritchie worked his way up from the bottom. Image source: Getty Images.

So what

It's hard to know how much its founder's controversial comments have hurt Papa John's. Same-store sales, however, fell by 3.9% in the fourth quarter, while they were basically flat (up 0.1%) for the full year.

The general turmoil hasn't been good for the company's stock. After closing January at $64.89, shares fell to $57.74 at the end of February, an 11% drop, according to data provided by S&P Global Market Intelligence.

"We know our potential is so much greater than our results, and we are taking significant steps to reinvigorate our record of profitable growth and value creation," said Ritchie in the Q4 earnings release. "Actions are under way to improve our brand proposition, how we connect with customers, and how we operate at the unit level."

Now what

It really comes down to whether Ritchie can return the focus to the brand, the pizza, and convenient service. The new CEO certainly understands all facets of the business, having worked his way up from being a $6-an-hour customer-service representative when he started at the company in 1996.

Fixing the brand, however, requires that Schnatter take a back seat. That hasn't happened yet (though the former CEO lately has been quiet when it comes to social issues). If the company's founder can tone down his role as the face of the brand, then customers should come back -- though the chain will probably struggle to find a marketing channel as powerful as the NFL.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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