Should Pizza Hut be sold?July 17, 2014: 1:12 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
Pizza Hut is going stale. It's struggling while its corporate siblings Taco Bell and KFC are doing reasonably well.
If the slowdown continues, should Pizza Hut owner Yum! Brands (YUM) consider selling the restaurant chain?
It's a legitimate question. Yum reported its second-quarter results after the closing bell Wednesday and the company's performance was clearly dragged down by problems at Pizza Hut. Shares fell nearly 7% Thursday on the news.
Same-store sales, one of the most important measures of health for a restaurant company, fell 3% at Pizza Hut. Sales were up at KFC and Taco Bell. Making matters worse, Pizza Hut's operating profits plunged 22% from a year ago.
Brian Bittner, an analyst with Oppenheimer, asked Yum management during Thursday morning's conference call about whether or not Pizza Hut should be sold or spun off if the company does not turn things around. But executives were quick to shoot that talk down.
Yum chairman and CEO David Novak said that "we believe in the power of global brands" and noted that Pizza Hut is doing well in China. CFO Patrick Grismer added that it wasn't long ago that Pizza Hut was on top of the market in the U.S. and it won't overreact to short-term concerns.
That said, Novak and Grismer were both pretty blunt about what needs to be done to get back on track. Both referred to Pizza Hut being in "turnaround" mode.
Novak said he was "obviously disappointed" with Pizza Hut's results -- especially in the U.S., where same-store sales fell 4% -- and that full-year profits would fall short of forecasts. But he added that Pizza Hut will have a new marketing campaign in the fourth quarter and that the company wanted to focus more on millennials.
Grismer added that Yum was not holding back on investments in Pizza Hut and that it needed to boost its digital initiatives in particular -- i.e. making it easier for consumers to order pizzas on their smartphones, tablets and other mobile devices.
Novak also urged analysts to try the company's new dessert, an 8-inch cookie that looks like a pizza and features chocolate chips from Hershey (HSY). Let's hope that Hershey's price hike doesn't make the pizza cookie more expensive!
Yum is big on what it calls "innovative" product launches. This is the same company that brought us the infamous Double Down sandwich from KFC and the new "quesarito" from Taco Bell. (I guess "burritadilla" didn't play as well in focus groups.)
But it may take more than culinary gimmicks to fix Pizza Hut. I think there are two big problems facing the company. And they are related. Consumers perceive it to be a stale brand. And there are a lot of other pizza chains out there. Several of my Twitter followers agree.
Ouch. If consumers don't like your product and can easily get something similar elsewhere, that's a bad sign. And Pizza Hut faces really tough competition from pizza pure plays (alliteration is fun!) like Domino's (DPZ) and Peyton Manning's favorite company Papa John's (PZZA).
One follower also suggested that Pizza Hut could differentiate itself from these two (and presumably the scores of other local by-the-slice mom and pop pizzerias throughout the country) by going more upscale.
Consider that Chipotle (CMG) is backing the founders of the original Pizzeria Locale to try and expand the concept beyond Colorado -- which is where both companies are based.
Now to be fair, Yum managers deserve some time to re-bake Pizza Hut. As the company has noted, it wasn't long ago that it had the biggest piece of the market share pie. And Yum has been a phenomenal company. Just look at how much better it's done than McDonald's (MCD) over the past 5 years. It has outperformed the S&P 500 too.
But one could argue that Yum may also be better off focusing on KFC and Taco Bell instead and not worry about the distraction that is Pizza Hut.
Taco Bell has made waves with the breakfast menu it launched in March. It's a chance to compete more effectively against McDonald's and even Starbucks (SBUX) during that key eating period.
And now that the worst seems to be over regarding a slump in KFC in China, the company can double down (sorry) on its attempt to become an even bigger player in India.
It probably wouldn't be hard for Yum to find a buyer. Private equity firms seem to have an insatiable appetite for well-known restaurant brands.
Wendy's (WEN) sold its Arby's unit to Atlanta-based Roark Capital Group in 2011. Chuck E. Cheese parent CEC agreed to sell out to Apollo Global (APO) in January. And in May, Darden (DRI) announced it was selling Red Lobster to Golden Gate Capital.
Golden Gate is a big fan of restaurants. It bought California Pizza Kitchen in 2011.
A Pizza Hut sale wouldn't be the first time Yum unloaded some struggling brands either. It sold the admittedly much smaller Long John Silver's and A&W Restaurant chains to franchisee groups for the two brands in 2011.
So if the new investments that Yum is promising in the fourth quarter don't pan (sorry again) out, then Yum should consider saying "arrivederci" to Pizza Hut.
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