Resurgence for Pizza Hut Restaurants, but Challenges Loom Large
Posted by Emily on 24th Aug 2024
Pizza Hut Restaurants, operated by Heart with Smart (HwS) in the UK, has made a significant turnaround by reporting a £1.75 million operating profit for its latest financial period, starkly contrasting to the £3 million loss recorded in 2022. This positive outcome was driven by a 7.7% increase in like-for-like sales for the year ending 3 December 2023, contributing to an overall £4.7 million improvement in operating profit.
Despite the profit, total turnover experienced a slight decline, dropping by 1.5% to £156 million. However, the overall profit for the period rose to £1.66 million, a substantial increase from the £168,000 reported in the previous year. Trading EBITDA also saw a significant boost, reaching £7.96 million compared to £4.67 million in 2022.
This financial turnaround follows a major restructuring of HwS's debt and equity earlier in the year. In its previous accounts, the group disclosed that it was in discussions to refinance nearly £31 million of its £73 million debt. This situation led auditors from PwC to express concerns, citing a 'material uncertainty' regarding the company's future viability.
HwS asserts that the restructuring has laid a 'strong foundation for future growth.' The group is confident it will not breach its covenant levels except in a 'severe but plausible' scenario where guest demand sharply declines in the summer of 2024. PwC, however, remains cautious, noting in its auditor's report that the uncertainty surrounding the business's future continues to be significant.
While market conditions have improved since 2022, HwS acknowledges that consumers are still facing challenges. Despite a rise in disposable household incomes, spending growth remains sluggish. Additionally, the business continues to grapple with elevated commercial energy costs, ongoing food inflation, and rising wage expenses. Nevertheless, the group's management maintains that the long-term fundamentals of the market are strong.
Alongside its financial recovery, HwS has continued to invest in transforming its Pizza Hut Restaurants model into a fast-casual experience. The introduction of mobile device ordering, currently utilised by around 60% of guests, has enhanced labour productivity and increased average ticket levels. In 2023, the group also invested in kiosk ordering and payment solutions, with plans to further expand this technology in 2024.
Moreover, HwS has signed a new 10-year franchise agreement with Yum Brands, the owner of the Pizza Hut brand, securing a stable platform for growth until 2032. Currently, Pizza Hut Restaurants operates as a separate entity from Pizza Hut Delivery, which is also owned by Yum Brands and has over 350 locations across the UK.
As a management buy-back deal, HwS acquired Pizza Hut Restaurants in 2018 from Rutland Partners. At the time, the group managed around 260 restaurants. However, following a Company Voluntary Arrangement (CVA) during the COVID-19 pandemic in 2020, many of its sites were closed, leaving the group with 142 restaurants across the UK today.