Papa John's says a key sales figure dropped 10.5 percent in July, and that it can't predict how long and badly it will be affected by the fallout with its founder.
The pizza chain slashed its sales outlook for the year, and its shares fell nearly 10 percent.
Last month, Forbes reported that Papa John's founder John Schnatter used the N-word during a media training call. Schnatter said the comment was taken out of context and has since criticized Papa John's for its handling of the matter.
Even before the controversy came to light, Papa John's said Tuesday that sales fell 6.1 percent at established North American locations. That was steeper than Wall Street expected, and marked the third straight quarter of declines.
That results show the multiple challenges facing Papa John's. It is trying to distance itself from Schnatter, its biggest shareholder and a board member. Meanwhile, Domino's Pizza has seen sales increase.
For the year, Papa John's now expects sales to fall 7 percent to 10 percent at established North American locations. Before the controversy, the company had forecast the figure to be flat to down 3 percent.
Papa John's International Inc., based in Louisville, Kentucky, has more than 5,200 locations.