Even Domino's CEO Thinks Pizza Hut Will Get Back on Track

Pizza Hut sales are down, but the pizza professionals don’t think that will last.

Aug 9, 2014 at 10:34AM

Source:  Pizza Hut.

You rarely hear companies who own national iconic brands say nice things about their competitors. That's exactly why when Patrick Doyle, CEO of Domino's Pizza (NYSE:DPZ), recently paid a compliment to the struggling Pizza Hut chain, I was left in a state of shock.  Despite yet another quarter of poor results, Pizza Hut is determined to get back in the groove and is quite optimistic that it will do just that. 

The not-so-Yum! results
Pizza Hut's parent company, Yum! Brands (NYSE:YUM), reported fiscal second-quarter results on July 16. Total Pizza Hut revenue slipped almost 1% to $265 million. Domestic same-store sales tumbled 2%. Operating profit plunged 22% to $63 million. The quarter's results were a little better than a 3% dive in domestic same-store sales the previous quarter, but it is still negative, which is still not good. 

Compare what Yum! Brands reported for Pizza Hut to Domino's results. For Domino's Pizza's second quarter, total revenue, domestic same-store sales, and operating profit all soared -- 8.8%, 7.7%, and 10.2%, respectively. It was as if the two companies were operating in completely different industries.

In a recent interview with The Street, Domino's CEO Patrick Doyle said his company has been growing nicely while some competitors have been having a harder time. He noted Pizza Hut's bumpy results, but expressed confidence Yum! would get back on track.

The most recent numbers from Pizza Hut are a continuation of what we've seen, since Pizza Hut seemed to have topped its domestic same-store sales growth in the third quarter of 2012 at 6%.  In the fourth quarter of that year, comps dropped by 1%. Full-year 2013 saw a 4% tumble. 

For Domino's, the growth has moved in the opposite direction. Last quarter Domino's domestic same-store sales growth was 5.4%. The quarter before that was 4.9%.  In 2013, they grew 5.4% on top of 3.1% the year before. 

Source: Pizza Hut.

"We will be back."
Yum! Brands' CEO David Novak acknowledges the shortfall. He stated in the earnings release, "At Pizza Hut, although second-quarter results were disappointing, we are taking significant actions in our U.S. business to reignite sales and expect to make substantial progress [in the] balance of [the] year."

During the conference call, he added, "We've had our ebbs and flows versus the competition over the years, and I can assure we will be back." Will the Pizza Hut-inator be back?

The plan to get its Yum! back
Novak's solution in a word: advertising. Yum! plans to launch a new advertising campaign targeting millennials. Though so far the company is short on revealing details, the plan is to set the perception of Pizza Hut apart from Domino's Pizza and other competitors who seem to target families more than millennials.

Additionally, Yum! Brands plans to step up its digital front, which has been lagging behind Domino's. The goal here is to catch up with, then surpass, Domino's and also Papa John's in terms of its digital ordering technology. 


Source: Pizza Hut.

Looking for the dough to rise
Novak also mentioned during the Q1 conference call that the company would be committing more resources toward digital with "a high sense of urgency."

We heard basically more of the same with the latest conference call, and it will be interesting to see if Yum! Brands can deliver on this promise. But I must say it is quite refreshing to hear a CEO own the company's shortfall instead of putting a spin on it or making excuses.

Going forward, despite Novak admitting that the latest quarter basically was a bad one for Pizza Hut, he is quite optimistic. During the conference call, a few choice comments of his stood out:

We think we are going to drive significant growth for pizza in the future. We are very bullish on pizza for the long term. ... We think we are going to get significant growth at our Pizza Hut in [the] next year and beyond.

Yum! Brands CFO Pat Grismer chimed in with:

We have a powerful brand. We can beat the competition. Things have softened [over the] last couple of years. We've taken our learnings and we are redoubling our efforts to bring the business back next year.

Fear not?
Domino's Doyle, of all people, also has confidence in Yum! Brands. As the CEO of Domino's he certainly knows the pizza industry. Doyle said in a recent interview with The Street, "Pizza Hut has had a little bumpier last few quarters, but Yum! [Brands] is a great organization. They'll figure it out; I'm sure they'll get back on track." 

At a conference back in November of last year, Domino's CFO Michael Lawton acknowledged Pizza Hut's reach, saying, "Pizza Hut is the leader in total pizza around the world." 


Source: Pizza Hut.

At another conference that same year during discussion about pizza in China, Lawton, according to a transcript, said, "I applaud Pizza Hut for [what] they did there." Though it should be noted that Pizza Hut in China has an entirely different business model that ironically doesn't sell as much pizza when compared to domestic stores, it goes to show you Yum! Brands' expertise no matter what the challenge. 

It tends to say something about management capability based on a long-term history of success when even competitors point out your strengths. It also adds some credibility to Yum! Brands' Pizza Hut plan.

Foolish final thoughts
It will be interesting to see if Pizza Hut makes a successful turnaround in just a year. If so, it will say a lot about the strength of the culture and management team over at Yum! Brands.

Domino's Pizza may have to watch its back as some of those Pizza Hut advertising plans include an attempt to take a bite out of Domino's digital edge. I'm not ready to jump into Yum! Brands quite yet, but I will be watching closely to see if the numbers begin to turn around as strongly as management hopes. 

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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