Papa John’s shares slide 12% on auditor switch, slow turnaround

Papa John’s shares have fallen 12% this week. The image shows the company's stock chart for the week of June 17, 2019.

Papa John’s shares have fallen 12% this week. | Screenshot courtesy of Yahoo! Finance

Papa John’s shares have fallen 12% this week after the pizza chain changed auditors and said it would pump another $80 million into franchises and branding.

The company said in filings with the Securities and Exchange Commission that its board had dismissed KPMG as its independent registered public accounting firm and that Ernst & Young will handle the duties from now on.

The pizza maker had said in February that its annual report would arrive late because KPMG needed “additional time to complete the audit.” Papa John’s also said that its audit report from March 8 “did not contain any adverse opinion,” except that KPMG’s report “indicates that the Company did not maintain effective internal control over financial reporting.”

Papa John’s said in May that while an internal review determined that its internal control over financial reporting was not effective, the material weaknesses resulted only in “immaterial errors” that did not require a restatement of any of its reports.

MarketFoolery podcast host Chris Hill Said that the developments did not reflect well on the pizza company.

Podcast guest Ron Gross, an investment adviser, agreed, though he had a more favorable interpretation of the development than Hill.

“It looks a little weird, especially with all that Papa John’s has been through over the last year,” Gross said. “They don’t need any more controversy. Just make pizza.”

A photo of John H. Schnatter holding a wooden pizza peel. Papa John's shares have fallen 12% this week.

John H. Schnatter | Courtesy of Papa John’s

The company recently ended a public feud with founder John H. Schnatter, who had been ousted from leadership over racist comments. Schnatter is no longer involved with the business or board but still owns about 19% of the company’s shares.

Over an 11-day stretch in mid-May, the founder had sold more than 4.8 million PZZA shares, worth about $177.5 million, according to filings with the Securities and Exchange Commission. He still owns about 6.1 million shares, worth about $275 million.

Papa John’s this week also said that it would spend another $80 million on domestic franchises and to boost its brand. The pizza chain said it would make new marketing dollars available to “activate its new ambassador, Shaquille O’Neal” and help franchisees through lower royalties.

BTIG analysts said the move indicates that sales improvements are not happening as quickly as the company’s leaders had hoped.

“This suggests to us that any meaningful sales turnaround has yet to take hold and franchisees are not yet capable of standing on their own with regard to unit economics,” BTIG analysts wrote, according to MarketWatch.

PZZA shares on Thursday closed at $47.16, down $3.58, or 7.1% for the week. Shortly before noon on Friday, shares traded for $44.82, down another 5%.