I was shocked to read that an article from The Wall Street Journal went to bat for Papa John’s; specifically, recommending investors consider buying PZZA stock. Granted, this was an op-ed, so the author’s opinions don’t necessarily reflect what the WSJ truly feels.
Nevertheless, as a fairly liberal media outlet, they’re incentivized not to produce any positive pieces on Papa John’s. The reason is obvious: company founder and former CEO John Schnatter uttered the N-word during a business conference call in May. When word got out, Papa John’s booted Schnatter immediately.
Subsequently, PZZA stock took a dive. From the start of this year, shares have dropped 17.5%. However, since August 8th, PZZA has jumped over 18%.
Thus, Papa John’s seemingly offers a classic contrarian opportunity. The target company is still fundamentally sound. It just has a mere PR problem. Once that goes away – and it will go away – customers will come right back to Papa John’s.
That’s the assumption, anyways. But I’m not so sure that PZZA can get away from this one so cleanly.
Papa John’s Battles in the Tough Fast-food Industry
When Papa John’s name comes up, the immediate reaction is “racism.” If you take a look at mounting criticism against the company, racism represents the overwhelming theme.
Clearly, several customers will likely cease patronizing Papa John’s for at least a considerable length of time. However, I believe a more pressing issue is the fast-food industry. While the new leadership team will successfully revamp the organization, the fast-food industry will never cease being ultra-competitive.
Recall that problems for PZZA began long before Schnatter embroiled himself in controversy. From the opening price of 2017, PZZA shares have dropped more than 45%. With the exception of a few blips here and there, the stock has suffered a pernicious bearish trend channel.
To put it mildly, the fast-food industry punishes miscues severely. In large part, that’s because customers have no shortage of options. If you don’t deliver the goods quickly, safely, and satisfactorily, you’re gone. But if you drop the N-word when you’re already embroiled in racial controversy (ie. NFL anthem protest remarks)? That’s not going to fly.
Sure, society – even liberal society – eventually will forgive Schnatter and the Papa John’s brand. But here’s my point: once that forgiveness occurs, the company would have lost significant ground against the competition.
The risk to PZZA shares is that customers will find other local pizza joints to patronize during this “anger period.” When the dust finally settles from this fiasco, these customers may have already bonded to their newfound pizzeria.