In business and in life, you are allowed leeway for certain mistakes. But some unforced errors are not only inexcusable, they are intractably damaging, perhaps crippling. Papa John’s (NASDAQ:PZZA) founder John Schnatter found this out the hard way. Inexplicably, Schnatter used the N-word during a May conference call. His subsequent admission and apology cratered PZZA stock.
In this age, that any business professional, let alone a white one, would think it’s appropriate to use the most vitriolic word in the English language is beyond me. Apparently, though, it still is a thing. So please allow me to take off my analyst hat for a minute and reiterate this point: if at any time you feel “compelled” to say the N-word, don’t.
You’re about to witness what an unforced, racially-charged mistake can cause. Schnatter will discover that he’s in a no-man’s-land. Associates, friends, and perhaps even some family members will distance themselves from him. Nothing he does will ever take away this stench.
Ultra-conservatives may counter that “it’s just a word,” that one mistake shouldn’t scar a person’s career indefinitely. As a person of faith, I agree. We should forgive. However, we must be extremely careful to not put our reputation in other people’s hands. Certainly, we should not speak or act assuming such forgiveness will be granted.
Schnatter and long-term investors of PZZA stock will also discover that most people aren’t as forgiving as me.
And this is the maddening point of it all. Schnatter was already in hot water last year for blaming the NFL’s “current debacle” on poor pizza sales that negatively impacted PZZA stock. Obviously, he was referring to the National Anthem protests.
Schnatter played coy, but public pressure forced him to step down as CEO.
A Surreal, Ugly Incident Will Weigh on PZZA stock
Why then did he remove all doubt about his thinking process when he uttered that word? That raises ugly questions because he can’t even blame a mental insanity bout. The NFL protests divided Americans along racial lines. It’s easily one of the most racially-charged incidents in professional sports history.
Indeed, so much ugly exists that it’s difficult to attempt a logical explanation. It’s not as if PZZA stock was tearing up the markets. And this shocking admission impugns any recovery story that was in play. But to find some meaning in this madness, let’s recount what happened.
According to a Forbes article, Papa John’s executives attended a conference call with marketing agency Laundry Service this past May. The Laundry Service team asked how Schnatter would distance himself from accusations that he is essentially a closet racist following his NFL-protest criticism.
He responded that “Colonel Sanders called blacks n—–s,” afterwards complaining that Sanders never received backlash. Additionally, Schnatter recalled stories he heard about in his native Indiana regarding brutal lynchings.
His apparent attempt to repudiate racism only made him look unhinged. In my opinion, it also violated fiduciary duty to those who are vested in PZZA stock. Unlike a personal outburst, Schnatter used the N-word as the public face of his company. Even worse, he made the incendiary comment while under public suspicion for being racist.
All told, I believe this is the beginning of the end for PZZA stock. Stepping aside from the race issue, Schnatter is undoubtedly a whiner. Rather than finding solutions for declining sales, he whined about NFL protesters. Later, he whined about how his whining sparked a backlash, justifying his position with an anecdotal and irrelevant story about Colonel Sanders.
During this time, rival Domino’s Pizza (NYSE:DPZ) soared.
What Do You Do With PZZA Stock Now?
Schnatter resigned his role as chairman of his company’s board. Don’t commend him for at least doing the right thing. It was the only choice he had.
But like I said earlier, nothing he does will make this right. Consider what happened to celebrity chef Paula Deen, who admitted using the N-word decades ago. The mainstream media crucified her, and she lost countless endorsement deals. Yet she made the remarks due to personal folly, not as a representative of a billion-dollar enterprise. Even former President Carter pleaded for leniency.
What Schnatter did, though, was to put his whole company in disrepute. Remember, he is the heart and soul of Papa John’s. The company bears his name, and its marketing campaign his face. Losing Schnatter in such ignominious circumstances is like McDonald’s Corporation (NYSE:MCD) losing Ronald McDonald to child-abuse charges.
Not only that, the former CEO and chairman victimized shareholders and employees with his selfishness. He could have easily conveyed his point (if he had one) without using that word. In fact, not saying the N-word is the easiest part of any job. Instead, he did what he did, and we’ll eventually see PZZA stock sink.
Don’t get me wrong: I’m no saint, and ultimately, I have no right to judge Schnatter. I sincerely hope he finds forgiveness. That said, transgressions have consequences. I think we can safely assume that Papa John’s African-American customers will pursue alternatives, along with other minorities. Left-leaning whites will probably do the same.
Finally, the company’s endorsement losses will benefit rivals like Domino’s and Yum! Brands‘ (NYSE:YUM) Pizza Hut. The only course of action is to sell PZZA stock while you can.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.