Pizza Hut launched a major menu makeover last November that was designed to make the brand more relevant to the changing tastes of customers and bolster the weak link in Yum! Brands' (NYSE:YUM) operations.
Taking a bite out of growth
The pizza shop has suffered through eight straight quarters of flat or falling sales at restaurants open for a year or more, an important metric throughout the restaurant and retail world because it measures growth that doesn't come from expansion.
For instance, the Yum! Brands Mexican fast-food chain Taco Bell has only had one quarter of negative comparable sales in the past three years while the KFC chicken outfit had just three such quarters. But Pizza Hut has only had four quarters of growth in that time frame and not a single one since the fourth quarter of 2012.
And this has come during the popularization of the idea that pizza could be a growth opportunity. Both Domino's Pizza (NYSE:DPZ) and Papa John's Pizza (NASDAQ:PZZA) have seen revenues double over the past three years with both enjoying strong comps while the pizza as a fast-casual dining concept gained traction.
Papa Murphy's Pizza (NASDAQ:FRSH) went public last year and investment in the space from established restaurants to private equity is exploding. Everyone from Buffalo Wild Wings (NASDAQ:BWLD) to Chipotle Mexican Grill (NYSE:CMG) wants a slice of the pizza business.
And you can't blame Pizza Hut's woes on that growth in fast casual. Taco Bell, after all, is doing more than surviving despite Chipotle's absolute dominance of the fast-casual niche.
What's on the menu
Yet the menu makeover Yum! Brands initiated for its pizza chain seeks to capitalize on that fast-casual trend by doubling the available ingredients available, offering 10 new crust flavors, 11 new flavor recipes, five new Skinny Slice recipes, new drizzles, and a whole lot more. In fact, there will be more than two billion customization options!
When Pizza Hut announced the change, I suggested it wouldn't have an effect, or at least not one Yum! Brands wanted. A confused mind always says no, I wrote, and the bewildering array of options available to customers seems to be stopping them in their tracks.
NPC International, Yum! Brands' largest Pizza Hut franchisee with 1,277 restaurants, reported fourth-quarter earnings last week and said revenues were "stressed" by the launch of the new menu. Comparable store sales fell 3.5%, on top of a 5.2% decline the year before, causing operating income to plunge 68% year over year.
President and CEO Jim Schwartz said, "Unfortunately, the new 'Flavors of Now' positioning did not deliver the sales momentum that we had anticipated."
In contrast, NPC's Wendy's (NASDAQ:WEN) business -- it's also a franchisee for the burger chain with 143 restaurants -- is performing quite well. While Wendy's accounts only for 10% of the total restaurants it operates, it accounts for 20% of its revenues.
Not the result of choice
Considering the burger business faces the same headwinds as pizza, and McDonald's (NYSE:MCD) has stumbled mightily from them, this doesn't bode well for Yum! Brands when it releases results later this month.
The restaurant chain admitted as much when it reported its own fourth quarter results in February, noting sales were softer than expected but defending that it was still early in what is a long-term game. Yum! Brands CEO Greg Creed was adamant in his belief "the Flavor of Now (menu) is instrumental to building a more relevant consumer proposition for Pizza Hut."
Fortunately, the U.S. Pizza Hut business is the smallest segment of its operations other than the relatively new India division, accounting for less than 10% of total annual revenues.
Customers still flying coop in China
But the company is still coping with the collapse of sales in its China division as a result of its second supplier scandal in as many years that continues to rock the industry. Last quarter comparable sales plunged 16% as the crisis deepened and despite assurances from management that it is just another temporary setback, the scandal risks permanently damaging its brand.
Investors have largely forgiven Yum! Brands, or at least absolved it, as shares of the restaurant operator have bounded 20% higher from the lows they hit back in October. But with China representing more than half of its revenues and Pizza Hut likely about to turn in a very disappointing quarter, its business looks strained and those gains could be easily sliced.