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

John Schnatter
John Schnatter

It'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.


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.

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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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