Papa John's Class-Action Lawsuit Puts More Heat on the Pizza Chain

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John SchnatterIt's not just the ovens heating up at Papa John's (PZZA) these days.

The pizza chain has a few battles on its hands. First, a viral campaign is building against founder and CEO John Schnatter among liberal-leaning pizza lovers after comments he made about the impact that President Obama's health-care reforms will have on his chain's hiring practices next year.

Then on Tuesday another battle started heating up the when plaintiffs initiated a $250 million class-action lawsuit over unsolicited promotional text messages that the pizza chain sent out in early 2010.

Republicans Better Love "Better Pizza"

Schnatter turned heads this summer when he told shareholders that the Affordable Care Act -- you know, Obamacare -- would result in as much as a $0.14 increase for customers buying a pizza.

He then made headlines again last week by suggesting that Obamacare regulations that kick in next year may possibly result in employees having their work weeks cut below the 30 hours required to qualify for employer-funded health insurance.

The Internet has blown up in response.

A photo of his house -- supposedly a 40,000-square foot castle complete with a 22-car garage, a golf course, and a drawbridge -- went viral on Facebook, pitting the wealth with the petty complaint about the cost of a pizza going up $0.14.

It's class warfare at its finest, but it's also missing the mark.

Mansion


Forget the Castle

Schnatter's comments weren't really about what he would do or what his company would do. A whopping 2,513 -- or 80% -- of the 3,156 Papa John's locations in North America are franchised. They're owned by local entrepreneurs who don't live in castles with drawbridges. They're competing against smaller independent pizza joints that aren't big enough fall under the Affordable Care Act stipulations.

At the same time you have Little Caesar, Domino's (DPZ), and Yum! Brands' (YUM) Pizza Hut fighting with promotions offering carry-out pizzas for less than $6.

This isn't class warfare. There will be real business decisions made next year based on the changing circumstances of running a large company.

You can keep hating Schnatter's drawbridge if you want to, but the point is moot, not moat.

Text Education

The latest setback for Papa John's is this week's $250 million lawsuit.

It was some franchisees -- and not Papa John's itself -- that worked with a text message marketer on a campaign that reportedly sent out 500,000 unsolicited messages two years ago.

That would violate the Telephone Consumer Protection Act of 1991, which bars unwanted text message advertisements. It remains to be seen if there's a case to be made against Papa John's, the franchisees, or the marketing company behind the ill-advised campaign.

Deep Dish, but Not Deep Value

This all comes at a time when shares of Papa John's aren't exactly cheap. It's trading at a lofty valuation -- 19 times this year's earnings -- despite the competitive nature of a dining specialty that's mired in a price war. That's also 16 times next year's projected profitability -- even though the company's revenue is growing in the single digits.

It seems as if the chain can't catch a break these days, even though it's the one manning the pizza cutter.

Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Papa John's International.




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35 Comments

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Bill

I take Papa Johns pizza when im constipatd it does a good job. Other than that I have never eaten one they are terrible.

November 19 2012 at 9:51 PM Report abuse rate up rate down Reply
worldsea7

I wonder were this will all end...in the mean time past me another slice.

November 16 2012 at 2:25 PM Report abuse rate up rate down Reply
martycpabranford

maybe you should have mentioned that since , as you say they are independently owned franchises they would fall under the level of employees that would necessitate the insurance coverage. Hence, the guy whose daughter was never offered it but worked full time. This is complete bullshit. The heck with papa johns their pizza sucks and their ceo is a fool.

November 16 2012 at 2:14 PM Report abuse +1 rate up rate down Reply
coochiescooter

Okay lib stooges, listen up. according to USA Today, 30 companies and organizations presently have waivers for Obamination care. Mickey D's and Jack in the Box are two of them.
You guys are hating life, Bain capital saved Burger King too, so now there's a couple more places you can boycott. No Mickey D's, No Burger King, No Jack in the Box, No Dominos, No Papa John's, No Chic-Fil-A. Keep up your socialist/communist movement stooges.

November 16 2012 at 7:52 AM Report abuse +1 rate up rate down Reply
coochiescooter

Looks like yooze lib stooges are running out of pizza places, Dominos was saved by Bain capital, and now you hate Papa Johns because he tells the truth about Obaminaton Care. OH yeah don't let us catch you sneaking into chic-fil-A for a chicken sandwich either.

November 16 2012 at 7:02 AM Report abuse -1 rate up rate down Reply
onebigcanine

Has anyone held a gun to your head and told you that you HAD to buy pizza from Papa Johns or work there ? Quit hating and get on with your life. Who freakin cares if he has to do what he does? How does it actually affect your life? I personally think the pizza tastes like crap and don't buy it but admire him for building the business the way he did .The commercials with Peyton Manning are pretty entertaining too! Get a life all you liberal, tree hugging, anti capitalistic liberals.

November 16 2012 at 5:31 AM Report abuse +1 rate up rate down Reply
Johnathan Foster

Well, as much as I like the pizza, they won't ever get my money again!

November 15 2012 at 9:49 PM Report abuse rate up rate down Reply
1 reply to Johnathan Foster's comment
coochiescooter

OH crap that'll kill his whole business,won't it ?

November 16 2012 at 6:51 AM Report abuse rate up rate down Reply
marine1942

Going to have neighbor pizza party tomorrow with Papa John Pizza.

November 15 2012 at 8:55 PM Report abuse rate up rate down Reply
mortimer1

Wait a minute, he can afford to reduce his franchise fees to allow the franchise holders to provide the insurance and scale down to something like a $20,000 footer with ease, so the position of the article misses the mark. If he can't compete, well then I guess there is something else wrong here and maybe his business model sucks.

November 15 2012 at 5:20 PM Report abuse rate up rate down Reply
GoJoe

Pizza Hut FOREVER!!!!!!!!!!!!!!!!!!!

November 15 2012 at 5:07 PM Report abuse rate up rate down Reply