Papa John's founder John Schnatter admitted to using the N-word during a May conference call and apologized for the comments after Forbes magazine detailed the incident in an article Wednesday.
“News reports attributing the use of inappropriate and hurtful language to me during a media training session regarding race are true," Schnatter said in a statement released by Papa John's. "Regardless of the context, I apologize. Simply stated, racism has no place in our society.”
Schnatter was on a call with marketing agency Laundry Service when he tried to downplay comments he made about the National Football League and allegedly said, “Colonel Sanders called blacks n-----s," and complained that the KFC founder never faced public backlash. The call was a role-playing exercise for Schnatter to prevent future public relations fumbles.
“The past six months we’ve had to take a hard look in the mirror and acknowledge that we’ve lost a bit of focus on the core values that this brand was built on and that delivered success for so many years,” CEO Steve Ritchie said in an internal memo obtained by CNBC that was sent Wednesday to team members, franchisees and operators. "We’ve got to own up and take the hit for our missteps and refocus on the constant pursuit of better that is the DNA of our brand.”
Shares of Papa John's fell by as much as 5.9 percent to a new 12-month low of $47.80 a share in intraday trading Wednesday following the report. The news erased $96.2 million in market value. Papa John's is down 12.5 percent year to date while Domino's shares are up 47 percent over the same time period.
"Papa John’s condemns racism and any insensitive language, no matter the situation or setting," a company spokesman told CNBC. "Our company was built on a foundation of mutual respect and acceptance."
Laundry Service, which is owned by sports agency owner Casey Wasserman, reportedly cut ties with an unnamed client in late May due to "the regrettable recent events that several employees of Laundry Service witnessed during interactions with a client’s executive,” according a letter obtained by Bloomberg.
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Shelley Lewis, a spokeswoman for Laundry Service, declined to comment.
Public relations consultant Eric Schiffer, chairman of Reputation Management Consultants in Irvine, California, told CNBC that it was a "colossal boneheaded move of which they will now have to rethink if they want to use him as a spokesperson."
The incident underscores the risks of using an individual to represent a brand, said crisis communications consultant Dan Hill, CEO of Hill Impact.
“This is the danger when organizations are too tied to a personality,” Hill told CNBC. “We saw it with Subway and Jared ... when things are going well and those people are popular, and they are doing smart things, it works. But then you have a single point of failure and it’s that person’s actions that reflect on the entire organization.”
The Forbes report comes just seven months after Schnatter abruptly exited the C-Suite. Schnatter faced backlash in November for critical statements he made about the NFL that ultimately caused the league to remove Papa John's as an official sponsor.
He blamed NFL leadership for hurting the company's performance because it hadn't resolved the ongoing controversy over players kneeling in protest during the national anthem.
While Schnatter is no longer the CEO of Papa John's, he is still chairman and is tied with the brand's image and is featured prominently on the company's pizza boxes.
“I think the big thing for them going forward is how do they distance themselves entirely from John?" Hill said.
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