With very few exceptions, pizza stocks aren’t enjoying a great year in 2017. Changing demographics, economic challenges, and the Millennial subculture, mean fast food is no longer a sure thing. Some companies choose to learn their lessons, and move forward. Others, like Papa John’s Int’l, Inc. (NASDAQ:PZZA), play the blame game.
In its third-quarter earnings report, the nation’s third-largest pizza chain’s performance was actually in line with expectations. PZZA earnings per share came in at 60 cents, exactly what Wall Street’s consensus called for. On the revenue side, Papa John’s registered $431.7 million, beating by 1.2% the consensus target of $426.7 million.
Unfortunately, merely meeting consensus was not what shareholders had in mind. PZZA stock plummeted after the earnings release. However, Papa John’s CEO John Schnatter didn’t do any favors when he attempted damage control. Instead of finding reasonable explanations, the original “Papa John” blamed the NFL’s “current debacle.” In all likelihood, he’s referring to the national anthem protest.
To be fair, Papa John’s has a legitimate reason to mention the NFL. PZZA is one of the league’s prime sponsors. Furthermore, according to Sports Illustrated, the Papa John’s brand name is the most recognized among such sponsors.
However, blaming the anthem protest issue is proving to be poor form. As previously mentioned, PZZA shares aren’t responding well. Moreover, this isn’t just a Papa John’s issue; other pizza stocks, most notably Domino’s Pizza, Inc. (NYSE:DPZ), have been hit hard recently.
Even sit-down pizzerias like BJ’s Restaurants, Inc. (NASDAQ:BJRI) are feeling tremendous heat. Neither DPZ nor BJRI have the sports-sponsorship leverage that Papa John’s carries. So some other reason besides protesting football players must be the culprit.
All Pizza Stocks Face the Same Headwinds
Rather than taking a cheap shot at the NFL, Schnatter should focus on demographic trends. While Millennials are also on the receiving end of sometimes-unnecessary criticism, for matters effecting pizza stocks, they’re more to blame than professional athletes who take a knee.
According to the Pew Research Center, Millennials became the largest working demographic two years ago. At 53.5-million strong, they leverage considerable buying power, especially as the oldest members of Generation X contemplate retirement planning. And because the average Millennial is in the sweet spot of being relatively young and cash-rich, their opinions matter.
Increasingly, this generation is cooking at home more often than their baby-boomer parents. Theoretically, that’s positive news for companies that cater to home cooking, such as Blue Apron Holdings Inc (NYSE:APRN). Unfortunately, that same sentiment is a headwind for pizza stocks levered towards sit-down restaurants.
Another interesting Millennial trend is health perceptions. According to a Morgan Stanley (NYSE:MS) study, young people prefer food that is “fresh, less processed and with fewer artificial ingredients.” Additionally, they value “good social ethics” — think Starbucks Corporation (NASDAQ:SBUX) or Chipotle Mexican Grill, Inc. (NYSE:CMG) without the food contamination.
This tendency sits at odds with both PZZA and DPZ. I’ve eaten many times at Papa John’s and Domino’s. While convenient, I wouldn’t classify their pizzas as spectacular. Certainly, they don’t have the fresh, authentic flavors found in your local mom-and-pop pizzeria.
Furthermore, Schnatter is a proud conservative. He also donated money to President Trump’s 2016 campaign. Let’s be honest — neither attribute appeals to the average Millennial, who generally voted for Hillary Clinton, albeit lukewarmly.
Politics is a No-Win for PZZA Stock
For the sake of his eponymous pizza chain and PZZA stock, Schnatter should quickly drop the contentious NFL issue and move forward. While he’s scoring points with conservatives, he might be winning a little too “bigly.” Prominent members of the alt-right embraced the Papa John’s brand, leading to a company statement condemning racism.
While the PR response seems ridiculous (no one can control who buys a particular product), in this case, Papa John’s had a strong incentive. As reported by The Washington Post, “blacks consume 1.2 times as much Papa John’s pizza as whites, and slightly favor Papa John’s over Domino’s and Pizza Hut.”
To avoid losing the edge to DPZ, or Yum! Brands, Inc. (NYSE:YUM)-owned Pizza Hut, Papa John’s can’t afford to antagonize any customers. Schnatter should have realized that getting politically involved is usually bad for business. The irony here is that I’m sure his company has a “no political talk” policy for employees.
PZZA stock will, in all likelihood, recover. In the interim, however, shareholders should expect a volatile ride. As is becoming apparent, management spent more time fishing out excuses than probable solutions.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
