NPC International operates 1,600 restaurants, including Yum! Brands' (YUM +1.04%) Pizza Hut, and recently defaulted on $800 billion of debt, as reported by Bloomberg. This comes as Pizza Hut faces mounting competitive pressure and higher operating costs.
NPC is considering options, including bankruptcy, to get out of this financial mess. It's going to take more than simply making better pizza for Yum! Brands to turn Pizza Hut around.
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The weak link in the chain
Yum! Brands owns KFC, Pizza Hut, and Taco Bell but makes its money by franchising these restaurants to third-party operators. With this operating structure, Yum Brands gets to benefit from the growth of these restaurant brands without carrying the burden of operating costs.
While KFC and Taco Bell have delivered strong results lately, Pizza Hut has lagged behind. It has lost market share to the leader Domino's Pizza (DPZ +1.76%). In the fourth quarter, Pizza Hut reported a decline in same-store sales, while Domino's has consistently posted growth in traffic.
Yum! Brands CEO David Gibbs acknowledged the struggles at Pizza Hut during the fourth-quarter conference call. "We are urgently taking steps to change the trend and are working internally with our franchisees to place the brand on firmer footing to grow," he said.
It won't be easy, given the technological lead Domino's has in carryout ordering. Yum! Brands recently shuffled its leadership team around at Pizza Hut to improve performance.
Gibbs said they "remain committed to an asset-light model and disciplined spending," but it's clear that extra investment at Pizza Hut may be required to close the gap with competitors.
