Yum! Brands Explores Sale of Pizza Hut. The Stock Rises.

Pizza Hut‘s comparable sales declined in the third quarter. (Alishia Abodunde/Getty Images))

Key Points

• Yum! Brands is conducting a strategic review of Pizza Hut, including a possible sale, to focus on stronger brands like Taco Bell and KFC.
• Pizza Hut’s comparable sales declined 1% in the third quarter, and its U.S. system sales plunged 7% from a year ago.
• Pizza Hut contributed approximately 11% of Yum’s total operating profits in the third quarter, compared to 52% from KFC and 36% from Taco Bell.

Yum! Brands is taking a fresh look at one of its legacy names.

The company announced on Tuesday that it is initiating a strategic review of Pizza Hut, including the possibility of putting the pizza chain up for sale. The move would signal Yum’s shifting focus to its stronger performing brands like Taco Bell and KFC. Yum stock is up 5.6% in late morning trading.

“The Pizza Hut team has been working hard to address business and category challenges; however, Pizza Hut’s performance indicates the need to take additional action to help the brand realize its full value, which may be better executed outside of Yum! Brands ,” CEO Chris Turner said in a statement.

On Tuesday, Yum posted its financial results for the third quarter ended in September. Same-store sales at Taco Bell increased 7% from a year ago, while KFC posted a 3% growth. Both chains have also been opening new stores at a steady pace. Systemwide sales are up 9% and 6%, respectively, compared with the year-ago period.

Meanwhile, Pizza Hut has lagged behind. The pizza chain saw comparable sales decline 1% in the quarter. What’s more, Pizza Hut’s profit margin is lower than the other two chains, accounting for only about 11% of Yum’s total operating profits in the third quarter—versus some 52% from KFC and 36% from Taco Bell.

Weakness at home has dragged on the pizza chain. Although its international operations posted a 3% growth, in the U.S. market, system sales plunged 7% from a year ago as it faces rising costs and stiff competition among fast-food pizza businesses. The company has noted in the past that Pizza Hut’s value proposition—especially in the U.S.—hasn’t kept pace with rivals.

Domino’s Pizza has posted strong growth in recent quarters as its menu innovation, attractive deals, and new delivery channels helped drive sales. Papa John’s International is in the middle of a transformation and there are early signs of success. Last month, the stock jumped on reports of a potential takeover by private-equity firm Apollo Global Management.

Yum’s decision to review Pizza Hut comes as the company named Turner its CEO, and CFO Ranjith Roy, just last month. In Tuesday’s earnings report, Turner said his three priorities for driving growth are staying relevant with young consumers, leveraging Yum’s scale to improve franchisees’ economics, and expanding its proprietary technology platform, Byte, across more restaurants.

A spinoff or sale of Pizza Hut would help Yum sharpen its focus on winning brands. The outcome will bear watching by investors and franchise partners alike.

Write to Evie Liu at evie.liu@barrons.com