Pizza powerhouses face tough tests

Oct. 11, 2006
Slumping sales at Pizza Hut and Domino's Pizza prove life at the top isn't always what it's cracked up to be. Though both chain's international numbers look good, domestic business at the segment's largest companies isn't as strong as they want it to be.
The pressure on publicly held companies is particularly keen. Analysts demand an explanation when things go sour, and shareholders get antsy when dividends dry up. Fortunately, stock prices for Pizza Hut (part of Yum! Brands) and Domino's are strong, and that speaks well of traders' and analysts' belief in a better future for both.
Following is a closer look at recent numbers posted by the pizza segment's largest publicly traded chains.
Most recent reporting period: third quarter
Comps: down 5% at 1,800 domestic company owned units; does not report franchise comps
Revenue and net income: results not broken out separately since it's owned by Yum
Units: 11,200
Most recent news: Despite concerns over marketing effectiveness, Pizza Hut is sticking with its longtime advertising agency, BBDO, after eyeing other providers. Saying the long-term view of its business is what counts, Yum will shift to publishing sales results quarterly instead of monthly.
During an Oct. 12 investor conference call, David Novak, chairman and chief executive at Yum! Brands, gave little insight into why Pizza Hut's domestic business woes continued in the third quarter. After reporting flat sales for September, he predicted Pizza Hut will finish at minus 3 percent for the year.
"Our sales results are improved, but they're still not where we want to be. And transactions remain down for the category overall," he said. "Our turnaround plan will be comprehensive in terms of marketing and operating plans. ... I cannot be more specific. I can tell you that we are all over this business and putting every Yum resource to bear that will help us turn this business around."
Lapping weak numbers next year, he said, should help put a positive twist on 2007 returns. Overall, the brand remains very solid. "Pizza Hut has the strongest brand equity in the pizza category, which gives us confidence."
While Novak said Pizza Hut's expansion into China is going exceedingly well, it's battling problems in New Zealand and Australia. It also must revive its United Kingdom operations, which it controls fully after buying back franchisee Whitbread's 50 percent ownership stake this summer. The company expects to begin re-franchising those 600 stores in two to three years.
Most recent reporting period: third quarter
Comps: down 3.1% in U.S. (down 2.3% at corporate units and 3.2% at franchised units); international up 3%
Net income: up 20.9% to $24.5 million
Revenue: down 3.2% to $326.7 million
Units: 8,238 
Most recent news: Sale of 11 domestic corporate units to franchisee, and sale of 155 company-owned operations in France and the Netherlands to master franchisee Domino's Pizza Australia & New Zealand; oven-baked brownie promotion launched in late 3Q.
During an Oct. 12 investor conference call, chairman and chief executive David Brandon commented on the company's negative sales trend, saying he believes traffic declines are a category-wide problem and not unique to Domino's. Consumers simply are spending less, he said.
"Consumer sensitivity to higher price points during this quarter impacted us," Brandon told analysts. "The major part of the quarter, we executed a promotion called Super Six that required an $18-a-check minimum. In retrospect, we were out there with a promotion that was asking the consumer for a higher-than-average check and during a time when the consumer was resisting that type of an offer."
When an analyst asked whether the company's delivery charge would disappear now that gas prices are falling, Brandon said he doubted it. Domino's adopted the practice, he said, because most pizza companies began doing it last year. He expects the charge will remain for good because pizzerias can use the revenue to beef up promotions efforts. "It's baked into the P&L; I don't see it going away. My personal prediction is that it's unlikely. It's hard for me to imagine a world where the delivery charge goes away."
Brandon complimented Papa John's for lengthening its long string of positive comps, but he said he suspects the company's top-line sales reflect its improved ticket averages and covers reduced traffic suffered by all major pizza players.
"Based on the third-party data we're getting, I would be surprised if Papa John's traffic situation is any more robust than the rest of ours," he said. "Papa John's is doing the best job and was positioned best in this environment, even though I think we're all dealing with very slow traffic counts."
When asked if continued sales declines signal some operational weaknesses, Brandon said the company's internal measurements show its operational performance actually is better than last year, when it turned positive same-store sales. Reduced traffic, he admitted, could explain the better store-level execution.
Domino's would not say whether its new Brownie Squares were selling well, only that the product's launch was so late in the quarter that its impact was difficult to measure.
Most recent reporting period: third quarter
Comps: up 4.5 % (4.3 % increase at company-owned stores and 4.5 % increase at franchised stores).
Revenue and net income: not yet released
International sales: up 30.9 %
Units: 2,964
Most recent news: Company repurchased 11 franchised units in the Raleigh, N.C., area for $8.8 million, and added a Spanish-language option to its online ordering portal.
* Has not filed its third-quarter report with the SEC.
Comments: Bill Van Epps, president of Papa John's U.S. operations, said in a recent interview with PizzaMarketplace, that two straight years of positive comps will be difficult to hurdle in 2007, but that "we've got some surprises up our sleeve that I think will help." He declined to provide details.
Most recent reporting period: third quarter
Comps: up 5.6%
Revenue: up 14.7% to $142.8 million
Net income: not yet reported
Units: 198
Most recent news: During the period, CPK opened its first restaurant in Japan.
Comments: CPK's defiance of the declining traffic trend in the casual-dining segment is noteworthy. Much larger players in this segment — with broader menus and deeper major-market penetration — are not faring as well as this 21-year-old, steady-growing, impeccably tuned concept. Upcoming public reports will detail what's driving its comps increase (i.e. higher prices, better check averages, etc.) but such strong revenue numbers speak of good top-line action.
Most recent reporting period: fiscal year 2006, ended June
Comps: down 3.7%
Revenue: down 8% to $12.2 million
Net loss: $6 million versus a profit of $204,000 last year.
Units: 371
Most recent news: Before the end of 2006, Pizza Inn will pay fired CEO Ronald Parker $2.8 million (which accounts for nearly half of its 2006 loss) in a settlement of litigation between the two parties. It also suffered a $1.3 million charge for shuttering a pair of underperforminng buffet units. It just announced plans to put 16 units in Guatemala.
Comments: Pizza Inn has fought a losing battle to produce positive sales numbers for the better part of the new millennia. In that time, two CEOs left the company (the first resigned, the second was fired) and a bloody board battle followed. Current CEO, Tim Taft, who came aboard in 2005 took on a monumental turnaround project that includes closing poor-performing stores and the outsourcing of its food distribution function, a regular revenue generator for the company. The good news is franchisees reportedly like him and are behind him, and the stock price, though modest, remains steady.

Topics: California Pizza Kitchen , Domino's Pizza , Operations Management , Papa John's , Pizza Hut , Pizza Inn , Public Companies

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