LOUISVILLE, Ky. (WDRB) – Speaking at a Louisville chamber of commerce luncheon in December, Papa John’s International CEO Steve Ritchie volunteered that his company was “in the middle of a crisis.”
After 14 years of steady growth, the nation’s third-largest pizza chain was on an unprecedented losing streak with declining sales and mounting store closures.
Company founder John Schnatter, the public face of Papa John’s for more than three decades, had become a pariah, twice suing the company after he was ostracized last summer after Forbes reported his use of racial language during a media-training exercise.
Three months after Ritchie’s “crisis” comment, Papa John’s is far from recovered, but the company is now enjoying a “moment of stability,” the CEO told WDRB News in an interview last week.
“We really see the light at the end of the tunnel,” Ritchie said.
In February, Papa John’s accepted a $200 million investment from hedge fund Starboard Value, providing a much-needed financial cushion and new board members, while averting an outright sale of the company. On Friday, Starboard exercised an option to invest an additional $50 million into Papa John's, a sign the firm sees promise in the deal's early results.
Earlier this month, Schnatter – who still owns about 30 percent of Papa John’s and has resisted being marginalized – agreed to give up his seat on the board and to stand down, at least temporarily, from his legal feud with Ritchie and the company’s other board members.
And Papa John’s has a new public face: NBA Hall of Fame member Shaquille O’Neal, who will become a company spokesman, restaurant investor and board member in a deal that will pay him $8.25 million over three years.
Wall Street seems to like the moves. The Papa John’s share price is up about 40 percent since the beginning of February.
“All of these factors have fueled a narrative that the company is building a legitimate turnaround plan and encouraged investors to be patient to see if it can start to deliver better sales performance,” said Chris O’Cull, a restaurant industry analyst with investment bank Stifel, wrote in a research note last week.
But as O’Cull noted, the ultimate test is whether the company can turn around pizza sales, which plunged 7.3 percent at its North American restaurants last year and remain depressed in first two months of 2019.
While about 88 percent of Papa John’s restaurants are owned by independent franchisees, falling sales mean reduced royalties for the company proper and lower sales to franchisees for supplies like pizza dough and sauce.
Amid last year’s turmoil, North American franchisees closed 103 more restaurants than they opened, up from 6 net closures in 2017 and 41 net openings in 2016.
The squeeze basically erased Papa John’s profits last year as the company took $50 million in “special charges” to address its mounting problems.
Among the charges: about $20 million in legal fees and an outside audit of the company’s culture, $15 million in royalty relief for franchisees and nearly $6 million in “reimaging” costs to scrub Schnatter’s face from pizza boxes and other materials.
Papa John’s employs about 800 people between its Louisville headquarters and commissary, which sells dough and other ingredients to franchisees.
While the company’s challenges haven’t resulted in layoffs, the Papa John’s annual report filed earlier this month shows the company saved $1.2 million by cutting its match to workers’ 401(k) retirement accounts in half, from 3 percent to 1.5 percent. (Company spokeswoman Lindsay English said the “discretionary” matching contribution is “based on a number of factors, including company performance.” The match had been 3 percent since 2015, reports show.)
Ritchie said he’s “not proud” of the company’s five consecutive quarters of sales declines and his first priority is to “get back to growth.”
“Obviously, we have to turn this around. That is my ultimate responsibility, to improve the results,” he said.
Ritchie, a 44-year-old Louisville native, once worked as a delivery driver and has spent his adult life operating Papa John’s restaurants.
Ritchie succeeded Schnatter as CEO on Jan. 1, 2018, a transition that was accelerated by Schnatter’s controversial comments blaming the NFL’s handling of players’ national anthem protests in 2017 for the company’s lackluster sales growth. (Papa John’s was an NFL sponsor at the time).
Schnatter groomed Ritchie and once praised him, but Schnatter’s tune changed last summer when the company moved to oust him.
Schnatter has suggested he has been made a scapegoat for the company’s problems while Ritchie, in fact, has floundered as the company’s leader and should be replaced.
In the interview last week, Ritchie suggested that the company has finally buried the hatchet with Schnatter.
“I think we arrived at a great, mutual solution for both parties. John is stepping down from the board; he plays no role any longer in the day-to-day management of the company,” Ritchie said. “And as you can see, over the last several months, there has really been no public dispute out there.”
But Schnatter, who declined to comment for this story, has indicated that he may reignite his dispute once the company complies with a court order to give him text messages, emails and other documents exchanged among board members and Ritchie last summer related to Schnatter’s ouster.
Asked whether he could imagine Schnatter returning in a public-facing role for the company, Ritchie said, “I think brands evolve … I see a different future for Papa John’s.”
Meanwhile, Ritchie said he doesn’t see O’Neal as a substitute for the role that Schnatter played for decades in commercials and other company advertising.
“We’re not intending to replace any one person anywhere in the brand,” Ritchie said. “We just want people who can really share our stories. When I talked to Shaq, it was very natural. I didn’t ask him to be part of our story. He said, ‘I want to be part of the story. I think I can help.’”
Disclosing its latest quarterly results in February, Papa John’s acknowledged that it continues to face “consumer sentiment challenges” – in other words, Schnatter’s NFL comments and use of racial language have alienated customers.
Ritchie said the company has made several strides in recent months toward “building a more inclusive culture” including adding five women and two African-Americans to executive leadership, including the company’s first chief of diversity, equity and inclusion.
The company also commissioned a law firm to perform an “audit” of its culture, but Papa John’s has not released the report publicly, only Ritchie’s written summary of its recommendations, which include things like diversity training for executives.
Papa John’s has also been conspicuously donating to nonprofits through a foundation the company seeded with $1.5 million. The highest profile gift has been $500,000 to Bennett College, a historically black women’s college in North Carolina that has been struggling to survive.
The foundation has also given to the Association of American Colleges and Universities ($500,000), the Boys & Girls working to Clubs of America ($250,000), and Lean into Louisville ($75,000).
Asked whether the increased philanthropy is motivated by altruism or the company’s desire to win back consumers, Ritchie said: “There is never a wrong time to do the right thing, and this company has always given back to the communities that we serve.”
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