When the moon hits your eye like a big pizza pie -- is that amore or a delivery guy with really bad aim?
Don't laugh and don't be fooled: Tossed dough topped with tomato sauce, oodles of mozzarella, and your choice of toppings, then baked to perfection may seem the simplest of recipes, but pizza is big business.
Think about it. For decades, the promise of a warm pie delivered promptly to your door has kept homebodies fed, happy, and dialing for more. And if scouting out locations for expansion, tracking volatile commodity prices, and keeping tabs on the competition for the next pricing-war outbreak isn't easy, it sure is lucrative.
Hot for Hut
For many, Yum! Brands' (NYSE:YUM) Pizza Hut takes the pie. With 12,000 locations worldwide, it's the largest pizza chain in the world, and last year's $5.1 billion in stateside sales and another $2.8 billion overseas accounted for nearly a third of the $25 billion pizza chain market.
Over the past five years, Pizza Hut has eked out a rather measly compounded annual growth rate of just 2%, both here and abroad. But that's not so shabby when you consider the girth its parent company is packing. Since being spun off by PepsiCo (NYSE:PEP) in 1997, Yum! has expanded its portfolio of concepts, including household names Taco Bell and KFC to 33,000 worldwide units. That's more than McDonald's (NYSE:MCD), but who's counting?
To think that it all started in 1958 when two college students were approached by a family friend with the idea of opening up a pizza parlor in Wichita, Kansas.
Kids, we're not just in Kansas in anymore.
Domino's dancing
Things were simpler back in 1960, when Tom Monaghan and his brother James bought the DomiNick's pizza shop in Ypsilanti, Michigan. A year later, bother James cashed out. Doh! His reward? A Volkswagen Beetle. Good one, James. Those Beetles were way groovy -- and they still are today -- but we're talkin' Domino's here.
The franchise grew to a modest 200 units by 1978, but it was in the decades that followed that things really heated up. The Domino's empire now spans 7,253 storefronts worldwide, including more than 2,000 outside the U.S.
As tastes have matured, so, too, have Domino's offerings. Pan and thin crust pizzas are menu staples along with Domino's original hand-tossed pies. Items like chicken wings, breadsticks, and its Domino Dots desserts flesh out a menu that once revolved around pizza and pop. Domino's was recently named "Chain of the Year" by Pizza Today.
Sadly, you can't buy Domino's -- at least not yet. The company doesn't trade publicly, but management is nonetheless forthcoming with its financials. Last year, for example, same-store sales grew 2.6% on the way to $60.7 million in reported profits, though the first quarter this year saw a 1.1% slide in comps. All told, the company produced $4 billion in sales.
But alas, brother Tom saw none of it. Like James, he eventually cashed out, too, selling his 93% stake in the company to Bain Capital, for, well, a lot more than a Beetle, that's for sure. But the legacy remains. Some Domino's just aren't meant to be toppled.
Don't cry (uncle) for Papa John's
In an industry that relies on fast cars and faster drivers, passing on a nifty set of wheels can be a sound business decision. Just ask Tom's brother, James. Or Papa John's (NASDAQ:PZZA) founder John Schnatter. He sold his prized Camaro Z28 to set up a pizza shop in what was essentially a broom closet behind his father's tavern in Indiana. That was 1984.
Since then, Papa John's has grown to 2,797 locations. Like Domino's, most of the units are franchised (in Papa John's case, less than 600 of the stores are company-owned).
The company has had a bad run of late. Better ingredients may make a better pizza, but what does it take to produce a better income statement? Earnings of $56.8 million on sales of $946.2 million last year dipped slightly from the year before. Papa also suffered a 1.3% decline in same-store-sales; unfortunately, it's gotten worse with a 4.8% decline through the first six months of 2003.
If there's a saving fiscal grace, it's the company's ambitious stock buyback program. Willing to eat its own cooking, Papa John's has repurchased roughly 44% of its outstanding shares. That allowed the company to grow its per-share earnings from $2.15 to $2.31 last year. Persistent operating weakness has the company looking to earn closer to $2.23 per share in 2003.
Buybacks may not be the most desirable way to defend the bottom line, but it could have been worse given the competitive environment. Pizza chains are everywhere these days.
Extra ingredients
While Pizza Hut, Domino's, and Papa John's have hooked up for a Chicago style, 60% slice of the $25 billion pizza chain market, other credible upstarts are growing by thinking outside of the pizza box.
A hip alternative has to be California Pizza Kitchen (NASDAQ:CPKI), with such exotic premium offerings as Caramelized Pear and Gorgonzola, Thai Chicken, and Peking Duck. With just 159 eateries, the company is expanding quickly, while treating investors to double-digit annual growth in sales and earnings.
If you want to stock up on even more pizza chains, check out Chicago Pizza & Brewery (NASDAQ:CHGO), Pizza Inn (NASDAQ:PZZI), or Chuck E. Cheese parent CEC Entertainment (NYSE:CEC). Don't place a market order for Pizzeria Uno, Sbarro, or Little Caesars -- they're all private.
No matter how you slice it, round pies make for square meals. Price wars might ding margins occasionally, as will the fluctuating price of cheese -- which, by the way, makes up 35% to 40% of the cost of goods sold. But either way, you get to feed the whole family for a dozen or so bucks, and that's a welcome treat in unsure economic times. If you ask me, that's what amore is all about.
Rick's either proud or awfully ashamed to admit that he's managed to try the pizza at all of the chains mentioned in this story, save for Chicago Pizza & Brewery. Oh, he'll get there eventually. Give him some time. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.
