August 8, 2018 / 2:06 PM / a month ago

Papa John's growing rift with founder casts doubts on recovery

(Reuters) - Shares of Papa John’s International Inc (PZZA.O) slumped as much as 7 percent on Wednesday and hit a near four-year low, a day after the U.S. pizza chain cut its current-quarter forecast blaming its ongoing tussle with the chain’s founder.

FILE PHOTO: John Schnatter (R), founder and chief executive of Papa John's Pizza, arrives at the 2011 American Music Awards in Los Angeles November 20, 2011. REUTERS/Danny Moloshok/File Photo

The company said on Tuesday second-quarter comparable sales fell 6.1 percent in North America and would continue to slip for the coming months, citing negative publicity from the acrimonious exit of founder and former Chairman John Schnatter.

Schnatter, who founded the company in 1984, was forced to leave in July following reports that he had used a racial slur on a media training conference call.

“Papa John’s results proved to be as eventful as expected with a sizable comp downturn, dueling press releases and ongoing boardroom drama,” BTIG analyst Peter Saleh said in a note on Wednesday.

Saleh said the pizza chain is now faced with an uncertain path to recovery as founder Schnatter continues to advocate for more control. The analyst also said that a sale of the pizza chain would be unlikely under these circumstances, despite depressed stock prices.

Right after the results on Tuesday, Schnatter issued a statement blasting Chief Executive Officer Steve Ritchie for the poor results.

The company’s shares hit a low of $38.05, levels last seen in September 2014, in early trading on Wednesday. The stock has lost 19 percent since Schnatter’s departure in July.

Ritchie on Tuesday vowed to move beyond the fight with a new advertising and marketing campaign, while also removing Schnatter’s image from company promotions.

Papa John’s said the efforts would cost it $30 million to $50 million over the rest of the year.

However, Stifel analyst Chris O’Cull questioned how effective the company’s campaign would be, given that Schnatter holds a 30 percent stake in the pizza chain. O’Cull cut his price target to $35 from $38.

Jefferies analysts said any turnaround would take time and that it did not expect same-store sales to turn positive until the second-half of 2019.

Reporting by Nivedita Balu and Siddharth Cavale in Bengaluru; Editing by Shounak Dasgupta and Sriraj Kalluvila

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