NPC International, the largest franchisee of both Pizza Hut and Wendy’s, declared bankruptcy early on Wednesday, as years of weak sales and massive amounts of debt ultimately proved too much to bear despite sales improvements during the pandemic.
The Leawood, Kan.-based company is one of the largest restaurant operators of any kind in the U.S., operating more than 1,227 Pizza Hut units—about 16% of the U.S. system—to go along with 385 Wendy’s units. NPC has $903 million in debt.
NPC said it has reached deals with its lenders on the framework of a restructuring and plans to sell its Wendy’s business, which has performed better overall in recent years. The company has been holding negotiations with Pizza Hut for months and filed the day after a forbearance agreement with its franchisor expired.
“While NPC’s Chapter 11 filing was expected, we view it as an opportunity to create a better future for NPC’s Pizza Hut restaurants,” Pizza Hut said in an emailed statement. “As NPC works through this process, we support an outcome resulting in an organization with a. lower, more sustainable level of debt, ownership focus on operational excellence and a greater level of restaurant investment.
“These changes will help NPC’s Pizza Hut restaurants generate the same momentum we are seeing throughout the Pizza Hut U.S. business and strengthen the overall health and performance of the entire system for the long term.”
In a statement on Wednesday, NPC said the Chapter 11 bankruptcy process would “substantially reduce” its debt and “strengthen its capital structure.” The company said it plans to use the process to hold more talks with its franchisors, landlords and other creditors.
“As our industry has been in the midst of dynamic changes due to shifting consumer preferences and dining behavior, we also have been facing increased labor and commodities costs and a higher level of financial leverage that presents obstacles to achieving our long-term business objectives,” Jon Weber, CEO of NPC’s Pizza Hut division, said in a statement.
“These challenges have been magnified recently by the impact and uncertainty of COVID-19, and we believe it’s necessary to take proactive steps to strengthen our capital structure, so we have the financial flexibility to continue to adapt to current industry trends.”
NPC’s filing had long been expected. The company had been struggling with the weight of years of weak sales at Pizza Hut and that debt burden. In January it missed an interest payment, leading to downgrades of its credit rating. The company also received emergency financing from its lenders in January, providing it with $35 million in liquidity.
In court documents, NPC largely blamed its problems on struggles at Pizza Hut, citing a “deteriorating brand image and lack of innovation.”
“The Pizza Hut brand continues year after year to lose market share to its national competitors,” the company said in a filing, noting that Domino’s and Papa John’s have evolved their delivery-focused businesses with “better technology or more compelling price and product offerings.”
NPC also operates many legacy “red roof” dine-in locations whose sales have been even weaker in recent years as consumers shifted their pizza spending toward delivery. About 40% of NPC’s locations are red-roof units.
The company said that weak sales and profits “prevented many franchisees, including the company, from transitioning the balance of its dine-in estate from standalone assets that cost more to maintain and are less profitable.”
NPC also said Pizza Hut relied on discounts to increase foot traffic, which had been falling in recent years. New leadership at the chain is focused on shifting away from that strategy, something that NPC says it supports.
The discounts came as NPC was faced with higher labor costs in recent years as intense competition for labor drove up wages and many states raised their minimum wage rates—higher minimum wages are expected to impact 30% of NPC’s Wendy’s units and 49% of its Pizza Hut units.
Competition for drivers from third-party providers also drove up wages for Pizza Hut’s delivery employees.
The pandemic only increased economic uncertainty. Sales at Pizza Hut initially spiked during the quarantine as consumers stayed home and ordered delivery, though NPC said in its filing that its sales have been slowing since. Wendy’s fell initially but has improved in recent weeks.
The coronavirus has also cost NPC money. The operator said that it spends about $750,000 per month on masks, gloves and plexiglass shields, a cost that is expected to last through the end of the year.
NPC said that the EBITDA, or earnings before interest, taxes, depreciation and amortization, was expected to be $5.6 million this year at its Pizza Hut units, down from $90 million in 2016. The pandemic has improved its outlook, with earnings projected to be $44.1 million.
NPC’s Wendy’s units, meanwhile, are expected to generate $48.8 million in EBITDA this year.
UPDATE: This story has been updated to include comment from NPC International.