Pizza Hut Slump Hampers Yum as U.S. Fast-Food Wars Heat Up

(Bloomberg) -- Yum! Brands Inc. still has to work do on its pizza business.

The dining-chain company saw its quarterly results pulled down by a surprise drop in same-stores sales at Pizza Hut, sending the shares down.

“We still believe the Pizza Hut U.S. turnaround will be a slow build, but we're encouraged by the foundation that's being put in place,” Chief Executive Officer Greg Creed said on a call with analysts.

The parent company of Taco Bell, KFC and Pizza Hut, which split off its China operations in 2016, has tried to revitalize its pizza brand amid stiff competition from rivals Domino's Pizza Inc. and Papa John's International Inc. Yum has been trying to improve the chain's appeal by embracing delivery, but discounts across the entire fast-food industry are making it difficult to drive growth.

Yum shares slid as much as 1.6 percent as of 10:25 a.m. in New York, even after it beat on profit and revenue. The stock had dropped 2.6 percent this year through the close of trading on Wednesday.

Pizza Hut comparable sales fell 1 percent in the latest quarter, while analysts had projected a 1 percent gain, according to Consensus Metrix. Globally, Yum's comparable sales rose 1 percent, missing estimates for 1.9 percent growth.

Rival Sputters

In an effort to drive a turnaround, Pizza Hut has recently expanded its beer-delivery push, and will look to benefit as some consumers dine less at Papa John's after its founder and former chairman admitted to using a racial slur. While John Schnatter later apologized and said he was taken out of context, the board and company has made an active effort to distance themselves from him, and Stifel analyst Chris O'Cull has said the brand has been damaged.

In February, Pizza Hut stepped in as the official pizza partner of the NFL, replacing Papa John's after an earlier controversy over comments Schnatter made about the league's handling of the national anthem protests.

With Papa John's mired in controversy, there could be an opportunity for Pizza Hut to find its stride, but the company faces challenges as it tries to update its image to focus more on delivery, according to Jennifer Bartashus, an analyst at Bloomberg Intelligence.

“There's something about the execution and product innovation that is not quite resonating with customers,” she said.

Delivery Push

Earlier this year, Yum partnered with GrubHub Inc. to expand delivery across the U.S. Its Pizza Hut president also joined GrubHub's board. McDonald's and other chains are heavily pushing delivery as well, including Chipotle Mexican Grill Inc., which has teamed up with DoorDash and Postmates.

Taco Bell's same-store sales also missed estimates in the quarter, climbing 2 percent compared to an estimate that called for 2.8 percent growth. KFC gave parent company Yum a boost, posting 2 percent growth in same-store sales to beat the 1.9 percent estimate.

The Yum chains are fighting for customers in an increasingly competitive fast-food market. McDonald's reported last week that its U.S. same-store sales gained 2.6 percent, less than analysts had been expected. Executives said that chain is tweaking its new Dollar Menu in the U.S. and trying to add more value meals to better compete in the cutthroat marketplace.

“The competition in the U.S. on value remains very very strong,” Bartashus said. “That's where KFC and Taco Bell are playing.”