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Pizza Hut's recovery gains speed

But its sister chain KFC stumbles in the fourth quarter amid intense competition.

Pizza Hut’s U.S. comeback picked up steam in the quarter ended Dec. 31, parent company Yum Brands said Thursday, but KFC’s comeback stumbled a bit.

The pizza chain’s same-store sales increased 2% in the last three months of 2017, offsetting what had otherwise been a challenging year in which same-store sales for the full year declined 2%.

But KFC, Louisville, Ky.-based Yum’s flagship chain, reported a 1% same-store sales decline, the first decline since 2014. Same-store sales rose 1% for the year.

Same-store sales rose 2% at Taco Bell in the quarter, representing a slowdown from recent history. For the full year, same-store sales rose 4% at the Mexican quick-service brand.

The results came during a quarter in which net income rose 44% to $436 million, or $1.29 per share, while revenues declined 16% to $1.6 billion, a decline due largely to refranchising. Yum also announced a $200 million investment in Grubhub.

Stock in the company fell by 2% in morning trading.

Pizza Hut

Yum has been working strenuously to improve sales at Pizza Hut—the company last year agreed to invest $130 million in the brand in a bid to generate positive sales there.

The company has vowed to improve ease of ordering and delivery times, including hiring 14,000 new delivery drivers. Greg Creed, Yum’s CEO, said that the company has made improvements in delivery speed.

Pizza Hut also added a new loyalty program, called Hut Rewards, which it advertised during the Super Bowl.

“We’re encouraged by initial trends of Hut Rewards,” Creed said. “We’re confident our investment in loyalty will pay off in the long run.”

While Pizza Hut’s same-store sales rose 2% in the fourth quarter, the brand’s system sales declined by 5% in the U.S. in the period, suggesting the company has closed some locations. Globally, Pizza Hut operates 16,748 locations. It had $12 billion in system sales last year.

KFC

KFC’s same-store sales decline ended a 14-quarter streak of increases. Creed blamed “increased competitive pressure” on KFC’s weak same-store sales in the fourth quarter, as other chicken concepts innovate on their menus and push their own value offerings.

“We’re disappointed on results,” Creed said. “But we’re bullish on 2018.” He noted that KFC’s same-store sales have increased for four straight years despite the fourth quarter decline.

The company recently generated significant buzz by naming the first female to play Colonel Sanders, the country artist Reba McEntire. And KFC expects to remodel more restaurants, with 40% of the chain’s U.S. locations expected to be spruced up by the end of 2018.

The U.S. is an important market for KFC, though it has long taken a back seat to China, where KFC generates 27% of its total system sales. By comparison, the U.S. is KFC’s second biggest market, at 18%.

Same-store sales in KFC’s China market rose 10% in the fourth quarter and 9% for the full year.

Taco Bell

The Mexican chain’s same-store sales slowdown comes amid an increasingly competitive market, one in which numerous fast-food chains are pushing their own value—one of Taco Bell’s primary strengths.

“Taco Bell was set up to be competitive in a competitive market,” Creed said, citing the brand’s introduction of Nacho Fries in January for $1. “It’s a competitive marketplace. What I like about the Taco Bell team is that it’s quick to respond to changes in the marketplace.”

Executives on the call noted that Taco Bell, in addition to expanding delivery through Grubhub, is working to make ordering inside of its restaurants easier. The brand in December announced plans to add self-ordering kiosks to all of its nearly 7,000 restaurants by the end of next year.

For the year, Taco Bell generated $10.1 billion in system sales, up 5% over the previous year. The company added 314 locations last year, including 77 in international markets.

Development and refranchising

Yum Brands refranchised 896 restaurants in the fourth quarter, including 685 KFCs, 144 Pizza Huts and 67 Taco Bells, generating $1.1 billion. The company is now 97% franchised and plans to get to 98%.

“We’re in the process of transforming Yum into a free cash flow machine,” CFO David Gibbs said.

The company’s three brands operate more than 45,000 locations globally. Yum’s brands opened 732 units in the quarter. For the year, the company added 2,600 locations, or about one location every three hours.

And executives believe the refranchising will only speed that development, because the company is tying its sales of restaurants to franchisees with development agreements.

“I still think there’s a lot more to come from development commitments,” Gibbs said. “It sets us up with momentum on the development front for several years to come.”

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