YUM! Brands Relies on Digitalization, Coronavirus Woes Prevail

Yum! Brands, Inc. YUM is poised to benefit from continuous focus on digitization, delivery services and global expansion. However, decline in traffic due to coronavirus-related woes along with high operating expenses poses concerns.

Let us delve deeper into factors highlighting why investors should hold on to the stock for the time being.

Factors Driving Growth

Yum! Brands has implemented several sales-building initiatives, which have contributed to the company’s performance over the past few weeks. Recently, the company announced an intra-quarter business update, including same-store sales, for the period ended May 31, thereby witnessing meaningful improvement in its business.

In May, KFC generated mid-teens same-store sales growth versus a decline of low-20s reported at the end of the first quarter. As of May 31, the metric grew mid-single digits. Pizza Hut also delivered low-teens same-store sales growth in May. At March-end, the same fell in mid-teens. At the end of May, same-store sales were up in low-single digits. Particularly in delivery and carry-out-only restaurants, the same grew approximately 15% year over year. Taco Bell registered slight growth in May same-store sales against nearly a 30% decline at the end of the first quarter. As of May-end, same-store sales declined in high-single digits.

Notably, the company is investing heavily in technology-driven initiatives like digital ordering to boost sales. It is also expanding its digital ordering capabilities by implementing various digital features in mobile and online platforms across all brand segments. Additionally, it updated its mobile app and Hut Rewards. Moreover, its partnership with online food delivery platform Grubhub is likely to boost online sales and delivery in the upcoming periods.

Meanwhile, YUM! Brands aims to revamp its financial profile and thereby improve the efficiency of its organization and cost structure globally. It believes that a “slimmer Yum Brands” would lead to efficiency gains.

Considering its existing footprint of 50,000 restaurants around the globe, YUM! Brands believes it can roughly triple its current global footprint over the long term. During the first quarter of 2020, the company opened 515 gross new restaurants and 65 restaurants on a net new basis. Moreover, master franchise agreements in Brazil (Taco Bell), Spain (Taco Bell), Russia (Pizza Hut), and the international growth alliance with Telepizza along with consolidate franchisees in Latin America and the Caribbean are likely to drive growth in the near future.

The company has adopted a de-risking strategy by reducing its ownership of restaurants through refranchising. We note that refranchising a large portion of the system reduces the company’s capital requirements and facilitates earnings per share growth and ROE expansion.

Concerns

The coronavirus outbreak has rattled the Retail - Restaurants industry, and YUM! Brands has also fallen prey. Due to the crisis, the company and its franchisees experienced significant store closures and instances of reduced store-level operations, including shortened operating hours and dining-room closures. Although the company has reopened majority of its restaurants, it is likely to witness dismal traffic due to the social-distancing protocols.

Moreover, the company has been continuously shouldering increased expenses, which have been detrimental to margins. This is due to an increase in the cost of employee wages, benefits and insurance, and other operating costs such as rent and energy costs. In first-quarter 2020, the company’s restaurant expenses amounted to $298 million compared with $272 million in the year-ago quarter. So far this year, shares of the company have declined 12.7% compared with the industry’s fall of 7.9%.

Zacks Rank & Key Picks

Yum! Brands currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include Jack in the Box Inc. JACK, Wingstop Inc. WING and Domino's Pizza, Inc. DPZ. Jack in the Box and Wingstop sport a Zacks Rank #1, while Domino's carries a Zacks Rank #2 (Buy).

Earnings in 2021 for Jack in the Box are expected to rise 22.9%.

Wingstop has a three-five year earnings per share growth rate of 11%.

Domino's has a trailing four-quarter positive earnings surprise of 12.7%, on average. The company’s earnings beat the Zacks Consensus Estimate in the last four quarters.

Today's Best Stocks from Zacks

Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2019, while the S&P 500 gained and impressive +53.6%, five of our strategies returned +65.8%, +97.1%, +118.0%, +175.7% and even +186.7%.

This outperformance has not just been a recent phenomenon. From 2000 – 2019, while the S&P averaged +6.0% per year, our top strategies averaged up to +54.7% per year.

See their latest picks free >>

Click to get this free report Jack In The Box Inc. (JACK) : Free Stock Analysis Report Dominos Pizza Inc (DPZ) : Free Stock Analysis Report Yum Brands, Inc. (YUM) : Free Stock Analysis Report Wingstop Inc. (WING) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research