Pizza Hut's largest franchisee reportedly considering bankruptcy

Dive Brief:

Pizza Hut's largest American franchisee, NPC International, is exploring restructuring opportunities including filing for bankruptcy, Bloomberg reports. The company operates more than 1,200 Pizza Huts and around 400 Wendy's restaurants. The franchisee secured a $35 million loan to improve the company's liquidity earlier this year.
The operator recently defaulted on around $800 million of its $1 billion debt after skipping loan payments and entered a forbearance agreement with lenders to allow time to weigh different debt restructuring options, according to the publication. NPC is working with restructuring advisers at investment bank Greenhill & Co., operational advisor AlixPartners LLP and private investment firm Eldridge Industries LLC, per the reports.
If NPC files for bankruptcy, the filing would help the company renegotiate lease agreements with landlords, Bloomberg reports. The franchisee is still considering options that would keep it out of court. Pizza Hut and NPC did not provide comments to Restaurant Dive before press time.

Dive Insight:

NPC's struggles are likely a symptom of growing demand for delivery, a consumer trend that Pizza Hut — traditionally a sit-down restaurant — has been challenging for the chain. Rising food and labor costs have also chipped away at revenue recently. Domestic same-store sales slipped 2% during Pizza Hut's Q4.

"There is potential for choppiness in near-term results of Pizza Hut U.S., primarily related to our largest franchisee," Chris Tuner, Yum Brands CFO, told analysts last week.

The pizza chain has tried to align its offerings with current diner trends, testing in-store kiosks in two Texas restaurants at the end of last year. If the pilot is successful, Pizza Hut may bring the technology to other stores in Texas, Arkansas and Louisiana. The Yum Brands chain has also leveraged a delivery partnership with Grubhub to try and compete with off-premise heavyweights Dominos and Papa John's and convert new customers.

The chain is also experimenting with self-service pickup cubbies at a Hollywood, California, store and will expand the test to other West Coast markets this year if it's successful. Pizza Hut isn't the only pizza brand looking to grow its mobile pickup business, however. On Monday, Domino's launched a new tech feature called Pie Pass that allows pickup customers to pay online or via its mobile app and skip the store line.

In a bid to overhaul its footprint with carryout and delivery in mind, Pizza Hut announced last year that it could temporarily close up to 500 underperforming restaurants in the next two years and remodel them. As part of this program, the company could deploy capital in the short-term to flip the market and give the stores to a new franchisee and then get the capital back. It's already worked with one franchisee that didn't have assets up to Pizza Hut's standards and worked with them to remove them from the system and get a new operator in place, Turner said during the company's February earnings call. Pizza Hut hasn't made any indication that this is what it might do with NPC, but given the operator's reach, quite a lot of capital would to move these stores into another franchisee with a stronger financial situation.