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Papa John's Franchisees Demand Management Do Something About Falling Sales

By Daniel B. Kline – Nov 13, 2018 at 6:04AM

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An association of the pizza chain's store owners has hired a top lawyer in its quest to push the company to make more of an effort to stop the slide initiated by ex-CEO John Schnatter.

Amid rumors that private equity firms plan to submit offers to take the pizza company private, a group representing 1,200 Papa John's (PZZA -0.47%) franchise owners has hired a prominent lawyer. The Papa John's Franchise Association (PJFA) has retained Robert Zarco, from the Miami litigation firm of Zarco, Einhorn, Salkowski and Brito with the goal of arresting "the ongoing decline in sales that began following Papa John's founder, John Schnatter's criticism of the NFL over the handling of the players' protest of the perceived discrimination against African Americans by kneeling during the national anthem," according to a press release.

It's a provocative action by the group, which represents over 40% of the chain's 2,729 North American franchisees, and it comes after the chain reported a 15.7% drop in third-quarter sales, along with a nearly 9% year-to-date decline.

"Having exhausted all other options, the association feels it has been left with no choice but to conduct an investigation and rectify the root causes behind the steady decline in its member's store sales," said PJFA Board Chairman Vaughn Frey. 

Pepperoni pizza

Papa John's has dropped its founder and former CEO from both its marketing and its management team. Image source: Getty Images.

What do the franchisees want?

Basically, they believe the company has not taken proper action to reverse the damage done to its reputation by its founder and former CEO. Frey emphasized that current management has failed to stop Schnatter from continuing to hurt the brand.

"He has put out his version of the truth on his website and has given several interviews on this issue which has kept the negative press coverage going," Frey said. "We are trying to move on from the controversy, but it is hard to do that when there is a new story being put out every other day about new developments relating to Mr. Schnatter and Papa John's."

The PFSA has not said precisely what it hopes to achieve by hiring Zarco. Instead, it has simply said that the attorney "has initiated an investigation into these matters to determine what action should be taken for the franchise owners to recover their losses and protect their investments from further damage." 

What does this mean for Papa John's?

If management does try to sell the pizza chain, an ongoing war with its franchise owners can only reduce the company's value. And the conflict could cause some potential acquirers to stay away.

The PJFA move comes only three months after the association signed off on a corporate effort to offer increased assistance to franchisees. That program included reductions in royalties, food-service pricing, and online fees for franchisees through the end of the year. It also offered them additional money for marketing and store renovations, in line with the chain's new branding efforts.

Schnatter, however, remains the story for Papa John's, and the company's board has been unable to keep him out of the news. It's even possible that the ousted founder might want to see the chain struggle, as that could aid his efforts to take it private himself.

This is an ugly story, and while it may not be getting uglier, the chain has thus far been unable to put its past behind it. This PJFA move simply ratchets up the pressure on current management, and may force them into a faster sale. It also may drive them to find some path to an agreement with Schnatter that finally muzzles the former CEO.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool is short shares of Papa John's International and has the following options: long November 2018 $55 calls on Papa John's International. The Motley Fool has a disclosure policy.

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