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Bear of the Day: Papa John's

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Papa John’s International (PZZA - Free Report) is back in the news, and once again - it’s bad.

Founder and former CEO John Schnatter resigned his position as Chairman of the Board after it was reported that he had used racist language on a conference call with representatives from the marketing firm Laundry Service. Ironically, the purpose of the call was to role-play public speaking situations and help Schnatter avoid saying things that might be construed as racist.

Schnatter confirmed the content of the conversation and has apologized, adding, “Simply stated, racism has no place in our society.”

Major League Baseball immediately dropped its “Papa Slam” marketing campaign, which gave baseball fans discounts on Papa John’s pizza after players hit Grand Slam home runs.

This is not the first episode like this for the company. The NFL dropped Papa John’s as its official pizza sponsor last November after Schnatter made comments during an investor conference call that were critical of the NFL’s handling of National Anthem protests at football games. Schnatter also apologized for those comments and resigned as CEO of the company.

Unfortunately for Papa John’s, even after his resignation(s), Schnatter is still seen as the face of the company as its founder and most recognized spokesperson. After all the company is named after him. As is usually the case in a social-media world, blowback has been swift and harsh, with countless public comments about everything from racism to poor food quality and a well-publicized boycott effort on Twitter.

Even before these recent incidents, Papa John’s was already performing poorly, with the shares down 32% over the past year, versus an increase of 16% for the S&P 500 and 28% for pizza-chain competitor Domino’s (DPZ - Free Report) .

The primary reason for the sinking share price is poor earnings.  Papa John’s missed the Zacks Consensus Estimate by almost 20% in Q1 – its second consecutive miss – and analyst estimates have been declining over the past 90 days for Q2, Q3, and full year 2018, earning Papa John’s a Zacks Rank #5 (Strong Sell).

When poor financial performance is combined with an increasingly toxic public image, it’s obvious that investors should steer clear. Unfortunately, that’s exactly what’s happening at Papa John’s.

Investors interested in the restaurant industry would be better off considering Del Frisco’s Restaurant Group (DFRG - Free Report) , a fine dining chain with a Zacks Rank #2 (Buy) or healthy pizza small-cap Papa Murphy’s (FRSH - Free Report) , which carries a Zacks Rank #1 (Strong Buy).

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