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.
Reader Comment of the Week! I'm a cranky Gen X-er. So anytime a millennial appreciates one of my prehistoric pop culture references, I get a little less ornery.
With that in mind, CNNMoney intern Ben Brody is this week's winner for two gems about Monty Python (regarding my column on Tim Cook) and The Beatles. Ben wrote our story on the
selfie photo of a Nebraska teen with Warren Buffett and Sir Paul McCartney.
Ha! Ben, the two of us need look no more. We both found what we were looking for.
Investing 101: If a stock is priced for perfection, bad news is going to cause a rush for the exits. That definitely was happening with fast food giant Yum! Brands (YUM) on Friday.
Even though the company reaffirmed its outlook for 2013, investors were spooked by an alarming 4% decline in same-store sales in China. Yum has focused heavily on China, particularly through its KFC franchise.
Shares fell nearly 10%. An overreaction? MOREPaul R. La Monica - Nov 30, 2012 12:32 PM ET
It looks like David Einhorn's latest prediction may be coming true.
Shares of Chipotle Mexican Grill (CMG), which Einhorn recently recommended shorting, got slammed after the casual restaurant chain reported earnings that fell short of forecasts. And, although revenue was roughly in line with estimates, investors were disappointed.
Chipotle's stock sank more than 10% after-hours Thursday. On Friday, shares fell more than 15% before gaining back some ground.
I fortuitously bumped into Einhorn MOREMaureen Farrell - Oct 19, 2012 10:23 AM ET
Tuesday brings the unofficial start to third-quarter earnings season, with aluminum producer Alcoa (AA) and KFC-owner Yum Brands (YUM) reporting after the closing bell.
Alcoa is typically considered the kick-off to earnings since it's the first major Dow (INDU) component to report. It's also considered a bellwether of the economy because of its global reach.
But Yum may actually grab the spotlight because of its large presence in China, where report MORECatherine Tymkiw - Oct 9, 2012 11:55 AM ET
Hedge fund manager David Einhorn's newest short target: Chipotle Mexican Grill (CMG).
Greenlight Capital's Einhorn thinks Taco Bell, owned by Yum Brands (YUM), will eat Chipotle's lunch with its new Cantina-style menu.
Chipotle was one of four stocks that Einhorn discussed during his presentation at the Value Investing Congress in New York. He also spelled out a case for why investors should buy General Motors (GM) and health insurer Cigna (CI). MOREMaureen Farrell - Oct 2, 2012 12:56 PM ET
When you think about the 4th of July, fireworks, backyard barbecues and Tchaikovsky's "1812 Overture" (music with cannons!) probably come to mind. And thanks largely to ESPN, the gluttonous International Hot Dog Eating Contest down in Brooklyn's Coney Island has also become a national Independence Day tradition.
The contest has been going on since 1916 at the Nathan's Famous hot dog stand at the corner of Surf and Stillwell Avenues -- MOREPaul R. La Monica - Jul 2, 2012 9:44 AM ET
Will the third trip to the public markets be the charm for Burger King's investors?
Burger King (BKW) started trading on the New York Stock Exchange Wednesday, and the home of the Whopper quickly popped nearly 7% from its opening price of $14.50.
In early April, the world's second largest hamburger fast food chain announced a new healthier menu replete with salads, wraps and smoothies. (The new bacon sundae is a glaring MOREMaureen Farrell - Jun 20, 2012 10:54 AM ET
Fast food. Slow economy. Europe and China are starting to hurt McDonald's (MCD). And the fears of a China pullback have really weighed on Yum (YUM), whose KFC brand is huge in China. Still, some traders are still bullish on Happy Meals and the Colonel's Crispy Strips.
HedgeyeHWP: $MCD - "Europe posted a 2.9% increase in comparable sales for May driven by the U.K., Russia and Fr, partially offset by Germany" MOREPaul R. La Monica - Jun 8, 2012 2:53 PM ET
Shares of McDonald's and KFC-owner Yum! Brands declined Friday amid growing fears about slowing economic growth in China.
McDonald's announced that its sales at stores open at least a year in the Asia, the Middle East and Africa region declined 1.7% in May, with particular weakness in Japan and China.
In fact, sales in China declined for the first time since November 2009, said Lynne Collier, analyst at Sterne Agee. Collier said that her conversations MOREHibah Yousuf - Jun 8, 2012 12:36 PM ET
|What's inside the Republican health care bill?|
|Markets are tired of the fixation on Trump and Congress|
|The 20-year-old leading the March Against Revenge Porn|
|Trump's deal on Obamacare repeal could break promise to protect the sick|
|Revised Republican health care bill is more costly, but doesn't insure more people|