Yum Brands Inc.'s KFC and Pizza Hut haven't kept up with rivals amid steep fast-food discounting.
Comparable sales trailed estimates in the first quarter, as diners flocked to competitors including McDonald's Corp. and Burger King for inexpensive fast food. That sent the shares down the most in 2 1/2 years.
The results show a heated race for diners' dollars in the U.S. Yum acknowledged that its launch of $1 nacho fries—popular with Taco Bell customers—weighed on margins in the quarter. This illustrates the challenge restaurant chains face: Even as the economy improves, competition will make it difficult for Yum to wean diners off lower-priced items, according to Jennifer Bartashus, an analyst at Bloomberg Intelligence.
"Consumers get very attached to those discounts—it makes it very hard to move away from that," she says.
Even Walmart and Amazon are in the fight
Driven in part by a resurgent McDonald's, chains have been forced to offer promotions and discounts to lure value-minded customers. Restaurants are also feeling pressure from Walmart and Amazon's fight over grocery products, which has given consumers other cheap food options.
Yum's total same-store sales rose 1 percent, short of analysts' projections of 2 percent. The shares fell as much as 5.8 percent to $81.63 in New York, the biggest intraday drop in almost three years. The stock had gained 6.2 this year through Tuesday.
Excluding some items, profit was 90 cents a share, beating analysts' average estimate of 68 cents. Revenue of $1.37 billion also exceeded projections.
Those results were marred by KFC and Pizza Hut, which failed to meet same-store growth estimates, Taco Bell's growth also weakened, with comparable sales rising 1 percent, down from a 2 percent increase in the prior quarter. The chain, which has provided strong U.S. growth for Yum with its indulgent fare and youth-focused advertising, recently lost its CEO, Brian Niccol, to Chipotle Mexican Grill.
Pizza Hut, meanwhile, has struggled to attract diners, especially in its home market of the U.S. The chain is improving its mobile app to speed up deliveries, hoping to compete with a surging Domino's Pizza, and using special thermal pouches to make sure its pizzas stay hot. Same-store sales at Pizza Hut gained 1 percent, below analysts' estimates of 1.8 percent, according to Consensus Metrix.
With delivery becoming increasingly important, Yum Brands in February agreed to buy a $200 million stake in Chicago-based GrubHub. The partnership will expand delivery for KFC and Taco Bell in the U.S.
Yum recorded $66 million in pretax investment income from the GrubHub stake, which added 16 cents per share of profit, the company said.
-- Bloomberg News