Whoa! Why Did This Pizza Delivery Giant Suddenly Hit a Major Pothole?

It’s a pizza delivery bull market, yet Pizza Hut is driving in reverse. Why is that?

May 2, 2014 at 10:03AM

Papa John's (NASDAQ:PZZA), Domino's Pizza (NYSE:DPZ), and Pizza Hut of Yum! Brands (NYSE:YUM) are raking in the cheesy bread by using their digital dominance to box in small, local competitors that are still stuck in the phone-order stone age. With nearly 50% of domestic orders -- and growing -- coming in through digital channels for all three, increased market share has been coming with ease. Then Pizza Hut dropped the ball in the first quarter.

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Source: Yum! Brands

Rising dough
Papa John's and Domino's Pizza last reported their results at the end of February. Papa John's reported that revenue popped 12%, same-store sales leaped 9%, and adjusted earnings per share exploded 32%. Domino's Pizza reported that same-store sales lifted 3.7% and diluted earnings per share flew 22%. Both of them continue to grow impressively.

Meanwhile, Yum! Brands reported a different story with a 5% same-store sales plunge for Pizza Hut. On the conference call, David Novak, CEO of Yum! Brands just came out and said it. He stated, "Now let's talk about Pizza Hut which clearly had a disappointing quarter." Same-store sales plummeted in the U.S. even after Pizza Hut launched a "new and improved hand-tossed pizza" -- otherwise they would have been even worse.

Mobileordering

Source: Papa Johns

Time to get more digital
Yum! Brands can't exactly blame the weather this time like it got away with for its Taco Bell shortfall. According to Patrick Doyle, CEO of Domino's Pizza, "Extreme weather and it actually can be ... somewhat more helpful for us than the opposite." Domino's Pizza's stance is that when it's too cold out or there are a few inches of snow on the ground and people don't want to leave the house, the smartphones start coming out and people start tap-ordering pizza.

Why did Pizza Hut fall short? Perhaps Yum! Brands was too busy focusing on its Taco Bell breakfast. Novak admits that Yum! Brands just isn't keeping pace with Papa John's and Domino's Pizza. He stated that Yum! Brands needs "to do a better job engaging the digital consumer where our competitors are frankly doing a better job driving activation." Yum! Brands plans to commit new resources toward digital again with "a high sense of urgency."

Pay attention, Yum! Brands
A couple of quarters back, Doyle of Domino's Pizza said something on the company's conference call that Yum! Brands should have heeded as a warning. He stated, "We're effectively competing against smaller players that either don't have digital ordering or certainly don't have the same kind of robust platform that we're operating on."

According to Domino's Pizza, all of the endless thousands of mom and pop and regional chains carve up only 50% of the pizza market and their share is declining. Papa Johns, Pizza Hut, and Domino's Pizza get to carve up the other half-- and rising-- all to themselves. However, that doesn't mean Pizza Hut will get its share of the "pie" without keeping up-to-date with its platform. Smaller chains can't afford to keep up but Yum! Brands needs to open its wallet, which it seems hopefully ready to do now.

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Source: Domino's Pizza

Foolish final thoughts
Domino's Pizza is still the leader in terms of both market cap and sales, but Papa John's is in second and gaining. It's growing faster on a percentage basis, and is that any surprise? Papa John's was the first of the three to pioneer digital ordering way back in 2001, the first of the three to hit 45% of sales through digital channels and the first of the three to hit $5 billion in digital sales, and it expects that it will be the first of the three to crack the "more than half" digital sales milestone. Domino's Pizza is not far behind at 45% at last count, but Pizza Hut is third at 40%. It's down but far from out. It will be interesting to see if Yum! Brands is able to stage a comeback in this three-man race.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool owns shares of Papa John's International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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