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Editor’s note: “Papa” John Schnatter submitted the following response to an article to our editorial team. As is always the case, we believe investors should be able to consume multiple viewpoints about a stock, and, based on that, make a decision to invest, to avoid, to sell, or even to short. I am honored that John has shared his viewpoint with the SA community. And I encourage forward-thinking executives to consider the opportunity that Seeking Alpha offers them: To engage with and exchange thoughts with their investor base, rather than trying to “control the narrative.”

October 20, 2020

Dear Mr. Arnold,

I read your October 12th article entitled Papa John’s Should Be Avoided. And while it’s disappointing to see the company I built from the ground up face such scrutiny, I must agree with many of the points in your analysis. The first of which says it all, in my opinion: “Papa John’s (PZZA) has benefited from a rising tide this year, not its own execution.” As you also point out, Papa John’s had a ‘revenue problem’ since 2018 and was showing few signs of being able to pull itself out of its sales doldrums .

Let me elaborate on some of the reasons for this lack of execution.

The company fundamentally changed how it measures quality since I departed, and the proof is in the pudding — based on the subpar product I have detected personally over the past two years, as well as the unsolicited feedback I frequently get from the general public.

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Also, for the first time in 11 years, Papa John’s was beaten out by Domino’s (DPZ) in the American Consumer Satisfaction Index in 2020, the standard in determining such a decline in quality. The customer votes with his or her wallet, and prior to COVID, Papa John’s was not a popular candidate with the consumer.

From a workplace standpoint, the company also faces hurdles. For five years running through 2018, Papa John’s was selected as one of the Best Places to Work in Kentucky by the Kentucky Chamber of Commerce and the Kentucky Society for Human Resource Management. The company has been notably absent from that list since my departure.

As you know, Papa John’s just announced that it is relocating most of its corporate functions to Atlanta, leaving behind its hometown of Louisville, Kentucky. They were already experiencing a brain drain, as many talented people have left the company in the past couple of years, and now much more institutional knowledge will be lost when people leave as a result of the corporate relocation. This is further complicated by the fact that the top level of management has no direct experience in the pizza industry, nor do any of the company’s directors.

It was clear that Papa John’s was struggling to correct its sales slide early in 2020 (Q1 three-year cumulative comps were -7.2%). Then along came nationwide lockdowns and restrictions on restaurants and other businesses, and suddenly delivery pizza was the place to be, lending a false impression about company performance in the short term. COVID-related sales increases beginning in March have been masking the deficiencies I noted above. And when our economy, and more importantly the dining sector, likely returns to some sort of normalcy in 2021, it’s very likely these recent sales gains will fall by the wayside just as the virus itself likely will.

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Furthermore, expecting a 45%+ increase in 2021 earnings seems like a stretch, as other dining options including in-person eateries become more available in 2021 as we hopefully emerge from this pandemic.

Regarding your characterization of me as “arguably unstable,” I must challenge your assessment. If you consider carefully the issues about the Papa John’s management I addressed in my interview on WDRB in November 2019, I was making the same points about them that you’re making now. Company executives have demonstrated a failure to maintain proper quality in product and service, as well as net store unit growth (there are now fewer North American stores than when I left the company – 3,284 vs. 3,441), thus pursuing a business plan that cannot sustain a credible performance in the share price of PZZA.

Other than the unnatural boost in sales due to a nationwide lockdown, those fundamentals exist today as much as they did one year ago and will serve to negatively impact performance for the long term without a major course correction.

If you would like to see an example of a stable, sustainable business plan, I would argue that the results produced by Papa John’s during my most recent tenure as CEO from 2009 through 2017 represent a model for the sector to follow (see chart below).

It is unfortunate that the inaccurate portrayal of comments made by me in 2018, as well as the company’s willingness to go along with a false narrative portrayed by a disgruntled advertising firm, have led us to a point where I am labeled as ‘unstable’ by a business writer such as you. Through litigation, I am demonstrating that the meaning of the comments I made against racism in 2018 were reversed and completely mischaracterized in the media and the company board at the time failed to properly protect the brand we had built over 34 years.

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The problem that Papa John’s shareholders have now is that the risk of holding the stock seems to be asymmetrical. Unless the company is acquired, the downward pressures on the stock price seem to outweigh any upward pressures.

These are numerous and include lackluster pizza quality, limited pizza experience among leadership, the loosening of COVID restrictions on other competing dining options in the coming year, food cost pressures (as recently noted in Domino’s Q3 earnings release), and negative store growth in the U.S. (a recent announcement of 49 new Philadelphia area stores in nine years seems hopeful at best based on regulatory hurdles).

All of these downward pressures don’t seem to justify a stock trading at 56 times this year’s earnings, in my opinion. Furthermore, the stock trades at 35 times analyst-projected 2021 earnings, which represents a 45% increase over 2020 and seems delusional given the pressures noted above.

I am proud of the results my team and I produced for employees, franchisees, suppliers and shareholders while I was at the helm of the ship. And I’m concerned for the future of this company which we built from the ground up by doing things the right way.

Sincerely,

Papa John Schnatter



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