American retail giant "consecutive explosions": "Papa Johns" plummets, Yum! Brands considers selling "Pizza Hut"

The American restaurant chain industry is facing a wave of intense shocks, with several pizza giants reporting negative news in succession, reflecting the grim reality of consumer fatigue spreading from low-income groups to the middle class.

On Tuesday, Papa Johns' stock price plummeted by 21%, marking the largest single-day decline since the outbreak of the pandemic in March 2020. In terms of news, private equity giant Apollo Global Management withdrew its acquisition offer to take Papa Johns private at a price of $64 per share about a week ago.

On the same day, Yum! Brands, the world's largest restaurant group, announced the initiation of a strategic review of the Pizza Hut business, not ruling out the sale of this struggling pizza brand. Pizza Hut's sales have declined for eight consecutive quarters, with current annual sales of approximately $1 billion, a 20% decrease compared to a decade ago.

As this round of industry turbulence occurs, Goldman Sachs has just issued a "red" warning regarding the health of American consumers, stating that consumer fatigue has spread from low-income groups to the middle class, with many corporate executives indicating that current consumer confidence is at its "worst level in decades."

Papa Johns Acquisition Deal Falls Through, Triggering Stock Price Plunge

Papa Johns' stock price fell by as much as 21% during trading on Tuesday, after media reports cited insiders saying that Apollo Global Management withdrew its privatization offer for the pizza chain about a week ago.

In June of this year, Semafor reported that Apollo, along with Qatar's investment fund Irth Capital, had proposed a privatization plan.

Papa Johns is set to release its third-quarter earnings report on Thursday, with analysts surveyed by the media expecting the company's adjusted earnings to decline by 5.2% year-on-year. The company did not immediately respond to requests for comment.

The collapse of this acquisition deal highlights the cautious attitude of private equity firms towards the outlook for the restaurant industry. In the context of sustained pressure on consumer spending, even established chain brands struggle to attract buyers.

Yum! Brands' New CEO Plans to Divest Pizza Hut Immediately Upon Taking Office

Chris Turner, the newly appointed CEO of Yum! Brands, announced on Tuesday that the company has initiated a strategic review of Pizza Hut. This decision marks Turner's first major strategic move since taking the helm.

Turner stated in a press release: "The performance of Pizza Hut indicates that additional actions are needed to help the brand realize its full value, which may be better achieved outside of Yum! Brands." Currently, Pizza Hut contributes less than 15% of Yum!'s total revenue, with sales hovering around $1 billion for years, a 20% decline compared to a decade ago.

Pizza Hut's predicament mainly stems from its inability to attract customers. This is not an issue for the entire pizza market—competitors Domino's and Papa Johns continue to see revenue growth in the North American market. Last quarter, Pizza Hut's global same-store sales fell by 1%, marking eight consecutive quarters of decline In contrast, Yum's other two major brands, Taco Bell and KFC, performed strongly. The third-quarter financial report showed that comparable sales for Taco Bell and KFC in the U.S. market grew by 7% and 2%, respectively, while KFC's international business (which accounts for 86% of the brand's business) saw a 3% increase in comparable sales. This helped Yum's overall comparable sales grow by 3%, exceeding the market expectation of 2.6%.

Robert W Baird & Co analyst David Tarantino pointed out in a research report that selling Pizza Hut may be welcomed by investors, as the pizza brand has been a drag on the company's overall growth rate. He estimates that selling this business could contribute about 1 percentage point to Yum's system sales growth. Yum's stock rose as much as 6.5% on Tuesday. As of Monday's close, the stock has risen 3.9% this year, while the S&P 500 index has increased by 16.5% during the same period.

The Shadow of Consumption Downgrade Looms Over the Restaurant Industry

The plight of pizza chains is a microcosm of the worsening consumer fatigue in the U.S. Due to ongoing inflationary pressures leading consumers to dine out less, Chipotle Mexican Grill has lowered its sales forecast for the third time this year. Company CEO Scott Boatwright stated, "Consumers are feeling the pressure, and we are feeling their retreat." He noted that customers lost by Chipotle are turning to grocery stores rather than other chain restaurants, indicating that people are choosing to cook at home to save costs.

After Chipotle's earnings warning was announced, its stock plummeted by as much as 16.5% in after-hours trading. This warning from an industry benchmark brand indicates that the pressure of consumption downgrade is no longer limited to low-income groups but is beginning to affect middle- and high-income consumers.

On November 1, Goldman Sachs consumer goods expert Scott Feiler pointed out that more companies are reporting a slowdown in consumption, and the weakness has spread to the middle-income group, especially consumers aged 25-35. Over the past two weeks, consumer stocks have faced significant sell-offs, with the discretionary sector underperforming the market by 500 basis points.

Kraft Heinz CEO Carlos Abrams-Rivera stated during the earnings call, "We are now facing one of the worst consumer confidence levels in decades." The company significantly lowered its full-year sales guidance, expecting a decline of 3% to 3.5%