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The Pizza War Is Heating Up

By Mark Yagalla – Jan 18, 2014 at 3:00PM

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With other restaurant chains looking to get into the pizza business, how do things look for Papa John's, Domino's, and Pizza Hut?

Today, it seems like every major restaurant operator is looking to get in on the pizza craze. Even Chipotle Mexican Grill and Buffalo Wild Wings are looking to get in on the action with new concepts. Who can blame them? Eating pizza is quick, convenient, and a multibillion dollar industry.

The big players aren't going to sit idly by and do nothing while newbies try and muscle in on their turf. With the pizza wars starting to heat up, it pays to look at what the top pizza chains are doing to defend their turf and fight off a challenge from the new entrants.

Papa is in the house
Papa John's International (PZZA 0.09%) is the third-largest take-out and pizza-delivery chain in the U.S. behind Domino's Pizza (DPZ -0.28%) and Pizza Hut, part of Yum! Brands (YUM 0.57%). The company has about 3,200 locations in the U.S. and Canada, with plans to add another 600 to 700 locations. To promote more store openings, Papa John's has offered a number of incentives to get franchisees to open more locations. The program is obviously working, as Peyton Manning has signed up as a franchisee in the greater Denver area.

What most Fools don't know is that Papa John's has a growing international business. There are now more than 1,000 Papa John's locations outside of the U.S. This segment is posting strong results, as comparable-store sales rose 8.1% in the third quarter. It turns out that the Papa John's formula works anywhere.

Domino's delivers
Domino's is pulling away from the competition with its mobile and online ordering platforms. Now you can order a Domino's Pizza with Ford's new Sync AppLink system. It allows the driver to order and pay via voice commands in the car. Domino's takes it a step further and gives customers their own "Pizza Profile" that saves payment information and details on your favorite pizza.

Domino's also plans to convert all of its nearly 11,000 restaurants to its "Pizza Theater" concept by 2017. This new concept offers an open kitchen with a modern look. The new environment offers seating for customers, so they can watch their pizzas being made. The goal for Domino's is to continue boosting its carryout business, which now accounts for anywhere from 30% to 50% of a location's sales.

Pizza Hut looking to grow one slice at a time
Pizza Hut is now trying pizza by the slice at two of its locations to appeal to customers who don't want a whole pizza. Eighteen-inch pizzas will be divided into eight slices and are available plain or with pepperoni and a few other choices from the kitchen. Each slice will cost $2 to $3 and take about four minutes to heat up.

Pizza Hut is also focused on capturing more mobile and online ordering. At this year's Consumer Electronics Show, Pizza Hut celebrated 20 years of online ordering. Now, about 40% of its orders are placed online and half of that is on mobile devices. Pizza Hut has also launched a smaller format for its stores in an effort to trim costs and capture more delivery and carryout business.

How do shares look as investments?
Yum! Brands is the cheapest of the three stocks and trades at 20 times next year's earnings and also has a 2% dividend yield. Domino's trades at 25 times next year's earnings while Papa John's is slightly more expensive and trades at 26 times next year's earnings. Domino's and Papa John's both have a 1.1% dividend yield. In the past year, shares of Papa John's were the big winners after rising more than 70%. Domino's shares trailed slightly by rising 54%. Shares of Yum! Brands lagged the overall market and posted a rise of only 10%.

Foolish assessment
Both Domino's and Papa John's have stuck to their core pizza market and have been making improvements along the way. As the pizza segment gets more crowded, they'll likely see more of an impact on their top and bottom lines. Yum! Brands won't be affected as much since the company also owns KFC and Taco Bell. My Foolish assessment is that "2014 Looks to Be a Better Year for Yum! Brands." 

Mark Yagalla has no position in any stocks mentioned. The Motley Fool owns shares of Papa John's International. 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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