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Papa John’s Just Took a Big Business Hit–and Tried to Blame Its Founder

If Papa John’s and its founder were smart they’d focus on fixing the business, not blaming each other.

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BY Erik Sherman - 09 Aug 2018

Papa John's Just Took a Big Business Hit--and Tried to Blame Its Founder

PHOTO CREDIT: Getty Images

Papa John's earnings announcement and call this week were savage. Same-store sales dropped 10.5 percent in July, the same month news came out of founder and former chairman John Schnatter's use of the n-word and an alleged toxic corporate culture. Earnings were down year-over-year by almost 25 percent.

Financial results have fueled a feud between Schnatter and Papa John's current management. Each points to the other as the problem. And they're both right and wrong. The problems are real and a focus on blame fixes nothing.

Take the earnings call remark about July sales:

As noted by [CEO Steve Ritchie] and outlined in our earnings press release, the recent events impacted July sales in North America. Our North America comparable sales for our 7th fiscal period, which occurred from July 2, 2018, to July 29, 2018, were approximately negative 10.5%.

"Recent events" mean Schnatter's use of racially objectionable language. (Although his blame on the conflict between NFL management and players taking a knee over racial justice for even more bad financial results last fall didn't help.)

Ritchie and the rest of management are right that Schnatter has to stop talking. When what you're saying is demonstrably failing to help the business, continuing becomes active damage.

However, Schnatter is not the sole source of problems in the company. Here's another part of the earnings call:

We're forecasting North America comparable sales of negative 7% to negative 10% for the full year, taking into account the significant and negative impact of the July 11 media coverage, and the continued media coverage. We are forecasting International comp sales of negative 2% to positive 1% for 2018.

It stretches credulity that such a large continuing plunge in comparable sales -- a critical retail metric that looks at changes of sales revenue in existing stores to keep expansions from providing a potentially misleading view of growth -- will all be due to the report of what Schnatter said. That seems disingenuous.

For example, the earnings release quoted Ritchie on the toxic culture Forbes reported:

We have also begun an external audit of Papa John's culture and will address any improvements that are recommended at its conclusion. Our entire leadership team understands the importance of getting our culture and business improvements right.

The Forbes reporting specifically identified Ritchie himself as a Schnatter loyalist "who [helped] enable its 'bro' culture." The CEO is as much on the hook as the former chairman and anticipated poor results sit equally with the management team and its behavior.

Schatter has been vocal about problems he claims are due to management. And he's right, as there are clear issues that the financial results show. Many started on his watch: Schnatter said, "Papa John's has been on the decline for a year-and-a-half to two years," although he was CEO until December of last year and chairman until last month.

But the company hasn't turned around yet and management has set the expectation for it to do even worse.

Bad publicity can hurt a business for a while -- sometimes a long while. When a business keeps heading downhill, there are more fundamental issues.

Papa John's had already had started falling further behind competitors Pizza Hut and Domino's, largely because it lacked a value-based message, according to at least one analyst.

A focus on blame stems from a need to protect ego, which frequently is in plentiful supply among people in upper management. Both sides in this conflict don't act as though there are more important things to address. All blame does is waste time if what you really want to do is to improve things.

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