Papa John’s Restates Earnings

Oops. Papa John’s International Inc.(PZZA), a popular US pizza chain, found a mistake in its accounting practices that forced it to restate its past earnings last week — resulting in a hefty 9% drop in their stock price. Carla Mozee for Marketwatch reported that a statement filed with the US Securities and Exchange Commission on Tuesday resulted in the price collapse.

As of early Saturday morning, PZZA’s Morningstar report showed only a slight recovery. The stock price was as high as $57.16 a share before the report came out on Tuesday, but it tumbled immediately when the accounting error was revealed, falling to $50.24. Their chart shows a partial recovery by today, but it’s still less than $53.

By comparison, competitor Dominos’s Pizza (DPZ) Morningside Report shows a generally upward trend for the same week, rising from roughly $45 a share before the Papa John’s announcement to a tad over $48 this morning.

The news from Papa John’s isn’t all bad. The pizza maker’s press release quoted CEO John Schnatter as saying, “We are very pleased with our 2012 results, highlighted by our ninth consecutive year of even or positive comparable sales growth.” Despite the tumultuous economy in recent years, they still report billion-dollar plus earnings, including $1.3 billion in earnings for 2012.

That’s a lot of pepperoni pizza. Still, the market reacted as expected when a large company restates earnings going back to 2009. The Papa John’s report continued:

“As a result of our review, we determined an error occurred in the accounting for one of our joint venture agreements, which contained a mandatorily redeemable feature added through a contract amendment in the third quarter of 2009. This provision was not previously considered.” The report also repeated several times that Papa John’s had a “noncontrolling” interest in the venture that caused the error.

That appears to be a fancy way of saying, “Hey, mistakes were made, but it wasn’t our fault.”

The Associated Press, reporting for NBC News summarized the numbers this way: “For all of 2012 Papa John’s made $66 million, or $2.58 per share, compared with $58.5 million, or $2.16 per share, in 2011. Sales rose to $1.34 billion from $1.22 billion.” Despite the mistakes, PZZA is still a profitable venture, and supposedly the earnings restatement will not ultimately affect their future earnings.

Did the market overreact when Papa John’s restated their earnings? Or would you rather spend your hard-won cash on the pizza instead of the stock?