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Papa John's cuts 2018 earnings guidance; shares slide

Papa John's International Inc. shares fell 9.33% to $37.24 as of 5:02 p.m. ET after the company slashed its full-year earnings outlook.

The company now expects EPS of $1.30 to $1.80, down from its prior guidance of $2.40 to $2.60.

Papa John's founder John Schnatter resigned as chairman in July following a Forbes report that he used a racial slur during a May call with a marketing company.

Papa John's posted adjusted EPS of 49 cents for the second quarter ended July 1, missing the S&P Global Market Intelligence consensus estimate for normalized EPS of 54 cents per share. This compares to a 65-cent adjusted EPS reported in the same quarter in 2017, which ended June 25.

The company's second-quarter adjusted net income totaled $15.9 million, missing S&P Global Market Intelligence's consensus estimate for net income excluding exceptions of $17.4 million and lower than the $23.5 million the company reported in the year-ago period.

The company said North America comparable sales for the period declined 6.1% and estimated a further decline in that metric. The sales are now expected to fall between 7% and 10% in 2018 as compared to the prior guidance of 3%.

Negative publicity badly affected July sales in North America, the company said in a statement, adding that it was hard to predict how long and the extent to which the negative customer sentiment will continue to impact future sales.

"While results have been challenged by recent events, we are committed to these strategic priorities and continue to believe that they will lead to enhanced performance," CEO Steve Ritchie said.

Ritchie added that the company has started 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," said Ritchie.

During a follow-up call with analysts, Ritchie noted that the company had been considering a pivot from its "founder-centric" business model after Schnatter's comments in November 2017. Schnatter had criticized the National Football League's leadership over national anthem protests by players.

In a statement following the results, Schnatter said that history shows the company performs better when he is involved and declines when he steps away.

"Today's results highlight the further deterioration of Papa John's financial performance under the tenure of Steve Ritchie," Schnatter said in a statement.

"Instead of addressing the real and fundamental issues confronting the company since that time period, and taking actions to turn sales around, the company is trying to deflect attention from the source of the problem — management's ongoing failures with regard to financial performance — and blame me for its problems," Schnatter added.

Due to the recent negative publicity, the company said it will incur significant costs for reimaging, branding initiatives, a company audit and legal costs. Papa John's is also providing financial assistance to franchisees to mitigate closings. The company estimated the cost of these measures at between $30 million to $50 million for the rest of the year.