Yum! Brands, Inc. second-quarter sales were not as high as the company had intended. In a conference call August 2, the company blamed the lag on a few key factors such as a timing mismatch between the general and administrative savings from the company’s continued refranchising efforts and the KFC distributor disruption in the U.K. in February, among other issues, but it was clear investors were concerned with another business aspect entirely: delivery.
The company warned last quarter than Q2 would likely be the weakest of the year. Sales at units open for at least a year rose 1 percent, which missed Thomson Reuters' estimates of 1.92 percent. Domestic same-store sales were flat for Pizza Hut (down 2 percent internationally). They're sill up 2 percent in the U.S. for the year compared to the prior-year period. Taco Bell's comps grew 2 percent, while KFC recorded a 1 percent lift stateside (up 2 percent internationally). Earnings per share rose 68 percent to 97 cents, year-over-year.
READ MORE: KFC, Taco Bell Bringing Delivery to 'Thousands' of Restaurants
Out-of-the-gate, in the question-and-answer portion of the earnings call, one investor after another asked for insight on the company’s delivery plans, for a total of four consecutive questions on the topic.
On February 8, Yum! and Grubhub announced a partnership to drive incremental sales to the company’s KFC and Taco Bell U.S. restaurants, where Yum! purchased $200 million of Grubhub common stock.
Although the deal was to onboard KFC and Taco Bell to the Grubhub system, the partnership also involved Grubhub expanding its board of directors from nine to 10 and appointing Pizza Hut U.S. president Artie Starrs to the newly formed seat as an independent director, based on the company’s experience fulfilling 100 million pizza deliveries a year.
“Grubhub and Pizza Hut will work together to determine how best to leverage their respective scale and expertise,” the companies announced in a release in February.
During the most recent earnings call, however, Grubhub, was not discussed in the company’s statement. A note in the release that preceded the call highlighted simply that the company had reflected the change in fair value of the investment in Grubhub by recording $25 million of the pre-tax investment income.
This was not enough for investors. It was clear they wanted to hear more about the company’s partnership and delivery goals moving forward, concerned—it seemed—that the partnership benefitting KFC and Taco Bell may cannibalize Pizza Hut’s preexisting delivery business.
David Palmer of RBC Capital Markets, the second investor to speak during the call, asked how the influx in non-pizza delivery is affecting Pizza Hut’s business.
Greg Creed, CEO of Yum!, insisted that the company’s connection with Grubhub is still very young and currently being tested. “We're in the very early days. We are seeing what you'd expect us to see, which is incremental transactions; we're seeing higher check.” The team is working to grow the opportunity with Grubhub, but the partnership is looking promising so far, he noted.
Then, John Glass of Morgan Stanley & Co. asked specifically about Pizza Hut’s existing delivery business, as a fair portion of stores, he said, don’t offer delivery currently. “So is there some sort of unlock that you can achieve early on in terms of getting some of those dine-in stores to deliver?” he asked.
David Gibbs, president and CFO of Yum!, assured Glass that there were dine-in Pizza Hut stores offering delivery, but that the company has delivery top-of-mind for new stores. “Where there are opportunities, we are taking advantage of the ability to add delivery to our dine-in assets,” Gibbs said. The vast majority of the stores the company is building and acquiring on the pizza front are delivery-capable. “You'll see our asset base become more and more delivery capable over time,” he said. “Both U.S. and internationally, our delivery business is in growth mode. Our delivery carryout business is in growth mode.”
But, in general, Gibbs didn’t have much of a satisfying answer. “Are we seeing other people getting into delivery impacting us? It would be hard for us to say that since we feel pretty good about our Pizza Hut delivery carryout business today,” Gibbs said.
Following this response, John William Ivankoe of J.P. Morgan Securities asked about the specifics of the KFC and Taco Bell delivery business, asking about the work done not just from the front end, number-of-restaurant perspective, but also on the back end of the Grubhub system itself. “A possibility to talk about your comps in the U.S. specifically which might be the future indicator of Taco Bell and KFC stores that have received delivery how much of an incremental boost to the business that's been?” Ivankoe asked.
“We're pleased with the initial results that we're seeing by adding delivery into Taco Bell and KFC,” Gibbs responded. “Behind the scenes we're doing all the work to integrate the systems with Grubhub, so that we can make this the fastest, most-seamless process for consumers and for our store employees.” The team feels good about how that work is going, but they are not throwing out numbers and targets, he said. “There are several milestones we have to get through as we go on this journey.”
There have been some hiccups, Gibbs indicated. “In fact, we're still trying to finalize the specific terms of the agreements that our franchisees will sign with Grub,” he said. “Until things like that happen, we don't have complete visibility to a timeline around certain units and when they'll all be on.”
Attempting to put a positive spin on the topic, Gibbs ended this answer by saying, “As far as the initial results, I think we're pleased with how things have gone.”
Then, for a fourth consecutive question on the topic, Karen Holthouse of Goldman Sachs asked, “Where you have been testing delivery, do you have any early data you can share in terms of delivery times that you're accomplishing or achieving?”
Creed, took this one: “Yes. I mean, look, I think the key is as we've been trying to say, this is very early. We're in test. We haven't unleashed the marketing muscle of each of the brands in order to drive it.” They are seeing delivery times they are happy with, he insisted.
“We've obviously got a very big Pizza Hut delivery business. We know what the expectations of the customers are,” Creed continued. “The transactions per restaurant are still small, but I believe that with all the work we've got from our Pizza Hut knowledge on how to deliver, that we are meeting the customer’s expectations.”
Gibbs then chimed in to assure investors of the company’s abilities to harness delivery across brands. “We're fairly sophisticated when it comes to the subject of delivery. We know delivery well from our Pizza Hut business. So, getting Taco Bell and KFC in, we have very high standards for where we want to ultimately get to. While we're pleased with where we're at right now in the journey, we know what ultimately the kinds of times and accuracy that you need to deliver in delivery. We're not there yet, but we're on that path to getting there with Grub right now,” he said.
The multi-year transformation strategy for the company is still on track, Creed said in a press release preceding the earnings call. “We continue to execute against our multi-year transformation strategy and remain on track with our full-year 2018 guidance. Second quarter core operating profit was consistent with our expectations and we are seeing good progress against our plans as we start the second half of the year.”
The company stressed in the release and the earnings call that it’s becoming more focused, franchised, and efficient in order to deliver more growth for shareholders. “We also remain committed to returning between $6.5 billion and $7 billion to our shareholders between 2017 and 2019,” added Gibbs. “Since the beginning of 2017, we have returned over $3.7 billion to our shareholders.” The company opened 243 net new units this year for 4 percent net new unit growth.