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Why short sellers are grabbing a slice of pizza

Why short sellers are grabbing a slice of pizza

Protests against police brutality and racial inequality are rarely uttered in the same breath as falling pizza sales, but shortsellers have jumped on a bizarre comment from Papa John’s CEO to profit from the stock’s subsequent slump.

The takeaway firm’s boss Joel Schnatter blamed sluggish pizza volumes on the NFL’s declining TV viewing figures, which he pinned on the kneeling protests by black players during the national anthem at games over the past year.

Started by San Francisco 49ers quarterback Colin Kaepernick, the protest snowballed, even prompting Donald Trump to wade in, condemning it. But few expected it to be wheeled out as excuse during an earnings call by Papa John’s, a major NFL sponsor, earlier this month.

Schnatter has since apologised, but the company’s share price has fallen by 13% since the call, and figures from Markit show that over 8% of its shares are now being shorted.

‘In what was arguably the most controversial earnings call of the Q3 earnings season, Papa John’s CEO John Schnatter and COO Steve Ritchie attributed their company’s weak forward guidance to the ongoing standoff between the minority of NFL players that are kneeling during the US national anthem and those – including US president Donald Trump – that wish to see the league force them to stand,’ stated Simon Colvin, a research analyst at Markit.

He noted although Schnatter may have some legitimate reasons for blaming the NFL for the company’s current headwinds, investor scepticism towards Papa John’s had been there long before the recent controversy.

He added: ‘In fact, shortsellers have been targeting Papa John’s since May of this year – a full three months prior to the NFL’s latest season.’

The woes of the broader pizza and the fast food industry have seen shortsellers taking aim at a number of companies in the sector, Colvin added. US firm Grubhub has around 40% of its shares out on loan, while the number of investors shorting Domino’s Pizza in the US, UK and Australia has also been elevated recently.

One reason put forward is the spread of food delivery apps, such as Deliveroo and Uber Eats, which both erode firms’ margins and market share.

Julian Fosh, who holds 3.7% of his Liontrust Special Situations fund in Domino’s Pizza, admits the company has been a poor performer recently, falling by 10% year to date.

However, the Citywire AAA-rated manager points out that the rise of delivery apps cuts both ways.

‘I have had a number of brokers’ notes focusing on the extent to which Deliveroo and Just Eat were affecting it,’ he said. ‘The point they made was actually, and they were quite clear on this, was that Domino’s has benefited from Just Eat.’

He noted Just Eat has in fact widened the market for Domino’s Pizza. Fosh also points out that despite the myriad of different cuisine available on Deliveroo, most people still opt for Chinese and Indian food or pizza.

‘So, it had an impact but is perhaps not as clean cut in one direction as people tell you. I do not think it will have a lasting effect. Of course, it’s absolutely impossible to know the future, though I must stress they [Domino’s Pizza] are a business which has ups and downs and has grown over different rates.’

Fosh added he remains confident on the business’ future growth and also pointed out that it is a long-term holding in his fund, with him and co-manager Anthony Cross having held it for over nine years.

As the US and UK incumbents are feeling the pressure, some smaller European businesses are starting to see growth.

One stock Marlborough European Multi-Cap fund manager David Walton holds, which fits this bill is Telepizza.

The fast food stock had a somewhat disappointing start to life with a rather flat float, but it has since ticked up and is now growing its presence into markets beyond its native Spain.

‘It had a very disappointing IPO where the shares fell and we took that as an opportunity to take a holding at that point,’ said Walton, who is AA-rated. 

He added: ‘It has a strong business in Spain and is also expanding in other geographies, including Latin America.’ 

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Julian Fosh
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