Investors are putting pressure on the three pizza companies that generated record revenues last year: Domino’s Pizza, Papa John’s, and Yum Brands’ Pizza Hut. While everyone is anxious to see how things will turn out, the coronavirus pandemic has placed all three chains in the strongest positions.
Competition will escalate this year due to slower growth in demand for pizza.
Domino’s, which has long dominated the pizza market, is up against competitors who gained an advantage in their turnaround efforts last year. Papa John’s is finally moving past the scandal that its founder, John Schnatter, created in 2018, while Pizza Hut is transitioning from a dine-in pizzeria to a go-to restaurant for delivery and takeout.
While all three pizza chains will face difficult comparisons to last year’s surging demand, Pizza Hut and Papa John’s will benefit from sluggish sales prior to the pandemic, giving them more room to grow.
“Whereas Domino’s has had essentially more than a decade of consistent growth in same-store sales, Papa John’s has been more inconsistent and hasn’t had the menu innovation that Domino’s has had, so I think there’s just more low-hanging fruit for Papa John’s to hold onto those [average unit volumes] and some of the sales growth that they had last year,” said BTIG analyst Peter Saleh.
Based on the company’s forward price-earnings ratio of 40.7, Papa John’s is the most expensive of the three stocks.
Domino’s is a distant second, with a price-earnings ratio of 29.6 times, while Yum is the cheapest pizza stock, with a ratio of 28.3 times.
Yum’s stock, on the other hand, has been steadily rising, reaching a 52-week high of $118.97 per share on April 15, while Domino’s and Papa John’s have seen more volatility. Yum also owns Taco Bell and KFC, both of which have quickly recovered from pandemic lows.
RBC Capital Markets recently increased its price targets for two of the firms. The bank raised its price target on Domino’s from $428 to $446. Yum’s price target has been raised from $111 to $112.
Domino’s stock was trading around $398 per share at midday Tuesday, while Yum’s stock was hovering around $117.
“A lot of these [pandemic play] stocks have underperformed recently on the assumption that once the economy reopens, it will be back to business as usual,” said Jeff Bilsky, portfolio manager at Chartwell Investment Partners. “However, I believe that is only true in the short term.”
Franchisees who are healthier
The pandemic pizza trend not only increased the amount of money in the companies’ pockets, but it also aided their operators.
“Everyone of their franchisees got a little bit healthier,” Saleh said.
Domino’s franchisees saw their store profitability rise, while Papa John’s annual unit volume in the United States surpassed $1 million.
However, Pizza Hut was the chain that saw the greatest shift in its franchisee base. NPC International, its largest franchisee in the United States, declared Chapter 11 bankruptcy in July. Pizza Hut reached an agreement with the bankrupt operator to close up to 300 of NPC’s locations, including many out-of-date dine-in restaurants.
Flynn Restaurant Group, already the nation’s largest franchisee, purchased 937 Pizza Hut locations and 194 Wendy’s locations from NPC.
Flynn Restaurant Group CEO Greg Flynn stated that he made the deal because he believes in the Pizza Hut brand and believes that the chain’s turnaround plan will be successful. The restaurant chain’s Pizza Hut portfolio includes about 200 dine-in locations, which he expects to be converted into smaller, delivery-focused units.
“The portfolio is now carrying much less than half of the debt that it did previously, which brings in a lot of dollars to reinvest in the restaurants and run them with the right labor model,” Flynn said.
Because of its size, Flynn Restaurant Group has easier access to capital than a smaller operator. It is the third-largest overall restaurant operator in the United States, trailing only Starbucks and Chipotle Mexican Grill, with approximately $3.5 billion in annual sales.
Pizza Hut has also changed hands.
Yum appointed Kevin Hochman as interim U.S. president more than a year ago, as part of another executive reshuffle at the pizza chain. He oversaw KFC’s turnaround in its home market and is still the fried chicken chain’s president in the United States.
Still, BTIG’s Saleh isn’t convinced of Pizza Hut’s turnaround.
“They’ve been in turnaround mode for as long as I can remember, so I’m not willing to say that this will be the catalyst that gets their comps back into positive territory indefinitely,” he said.
Defying pizza fatigue
All three chains are battling pizza fatigue with new menu items as they try to retain customers.
“We’ll be the first to admit that we took longer than we should have to introduce new things to our menu,” said Domino’s chief financial officer Stu Levy in February at a UBS conference. “We chose a several-year gap that we would not anticipate in the future.”
Domino’s innovation efforts have been more focused on technology in recent years, investing to make ordering and receiving a pizza faster and easier. Last summer, however, Domino’s introduced two new specialty pizzas — chicken taco and cheeseburger — as well as new chicken wings, which have seen a surge in popularity during the pandemic.
According to Levy, the company has been selling all of the chicken wings it could get its hands on, despite the fact that the menu item has yet to be advertised on television. The downside is that chicken wing prices have risen in response to the increased demand. There was even a scarcity ahead of the Super Bowl.
Papa John’s recently added Epic Stuffed Crust, which the company plans to make a big part of its 2021 menu.
According to BTIG’s Saleh, the stuffed crust has helped the pizza chain maintain double-digit same-store sales growth through the first week of March, even in states that have reopened. Shortly before last year’s lockdowns in the United States, the chain introduced Papadias, flatbread pizza sandwiches that have been bringing in additional sales for Papa John’s.
Pizza Hut likes to spice up its menu with limited-time offerings, such as Detroit-style pizza, which debuted in January.
Thanks to a recent agreement with franchisees in exchange for investments in new restaurant equipment and remodeling, the brand’s management now has greater marketing control to tout its promotions. Yum’s two recent technology acquisitions will also help Pizza Hut reach out to new customers online.
Low prices will almost certainly help the three chains retain their appeal to cash-strapped customers.
While many consumers are gearing up for a summer of retaliation spending after months of no travel and little dining out, many will still be unemployed or under-employed.
According to Saleh, the best deal for consumers in terms of value is Domino’s $5.99 promotion.
However, it now faces new competition in the form of Pizza Hut, which launched its $10 Tastemaker deal in September, which includes a large pizza with any three toppings for a family meal. It’s a strategy Hochman has used before, when he introduced the $20 Family Fill Up bucket at KFC to boost sales in 2015.
“As life returns to normal and customers have more food and dining options, we are confident that the Pizza Hut plan we have in place will continue to provide customers with the pizza they love in a relevant, easy, and distinctive way,” Hochman said in a statement.
Outside competition During the pandemic, pizzerias were not the only ones delivering food.
Third-party delivery companies such as DoorDash and Grubhub reported strong quarterly growth as more people tried their apps for the first time. According to analytics firm Second Measure, third-party meal deliveries increased by 137 percent in February 2021. In the United States, 47 percent of consumers have used a third-party delivery app, up from 37 percent a year ago.
Only Domino’s has not partnered with any third-party apps out of the three largest publicly traded pizza chains.
For Papa John’s and Pizza Hut, the apps allow them to reach new customers, but they also charge hefty commission fees on every order, which either eat into the transaction’s profitability or are passed on to customers.
According to the franchise disclosure document, Domino’s charges its franchisees about 27 cents for each online transaction.
Third-party delivery is expected to be one of the long-term trends, according to industry experts. According to NPD Group analyst David Portalatin, eating restaurant food at home was already a trend. The pandemic only exacerbated the situation. That could be bad news for pizza chains because the apps provide consumers with a wider variety of meal options.
Nonetheless, even as the world returns to normal, Papa John’s said that its aggregator sales are still strong.
One factor clearly favors Domino’s, Pizza Hut, and Papa John’s: they are still in business.
According to a March report from Datassential, a firm that tracks restaurant menu penetration, one in every ten restaurants in the United States has closed permanently.
Chain restaurants appear to be more likely to capture that market share because they have recovered faster than independent restaurants.
“Wow, that’s a big number. “This isn’t the tech sector; it’s the restaurant industry,” Chartwell’s Bilsky explained. “Even a 10% market share across the board is significant.”