Yum Brands' Digital Acuity and Value Orientation Should Position It Well Despite Tough 2024 Backdrop

Equity Analyst

Sean Dunlop

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The restaurant industry has changed a lot over the past three years. We remain encouraged by the ability of the largest operators, including Yum Brands, to accelerate critical investments in e-commerce platforms, delivery integration, and technological solutions that meet the demands of the modern restaurant consumer. Recent acquisitions demonstrate the emphasis the firm has placed on digital enhancements, with 45% of systemwide sales now coming through digital channels, which we expect to remain integral to Yum's strategic playbook.

Yum's competitive strategy has evolved in recent years, with the firm restructuring its corporate operations along brand rather than geographic lines after the spinoff of its China unit in 2016. Today, Yum's priorities include strategic menu development, ease of access, and distinctive brand identities. These pillars reinforce the strength of Yum's family of brands, driving our forecast for low-single-digit comparable sales growth across the portfolio. While the competitive picture remains dynamic, the firm's continued investments in international expansion appear well placed and underpin management's high-single-digit systemwide sales growth forecast, with our 7% estimate through 2027 falling toward the lower end of that guidance as competition for international growth intensifies.

We note Yum's turnaround efforts with Pizza Hut point to one of the shortcomings of a nearly fully franchised model: the difficulties associated with hefty capital investments required for meaningful brand repositioning. The bankruptcy of Pizza Hut’s largest franchisee in 2020 marked the culmination of a turbulent couple of years for the banner, though more profitable delivery-oriented formats, investments in mobile order and delivery capabilities, and better capitalized franchisees could prop up the brand in the medium term. The banner generated positive unit growth in each of the last nine quarters after more than 1,000 net store closures in 2020, offering a nice green shoot for patient investors, but a still-sizable legacy footprint and tepid comparable-store sales will drag on near-term growth, in our view.

Business Strategy & Outlook

An ever-competitive restaurant industry and constantly shifting consumer preferences make carving out an economic moat difficult, but we believe that Yum Brands’ portfolio of relevant, distinctive, segment-leading brands and a scale-driven cost advantage provide an enduring competitive edge, consistent with a wide economic moat rating. Despite increased category competition, shifting consumer health preferences, and the democratization of restaurant technology, Yum’s brands have been able to consistently generate positive comparable sales growth over the last five years, leaving aside pandemic-induced downturns. In our view, Taco Bell and KFC (the largest players in the limited service Latin and chicken categories, respectively) maintain brand intangible asset and cost-driven moats, demonstrated by recent pricing power, impressive unit-level growth (reflecting attractive underlying unit economics), international portability, and a scale-driven procurement cost advantage. Despite competition from Western brands, particularly from Chick-fil-A and Popeyes in the U.S., and local competitors, we think exclusive franchisee relationships, slowly changing consumer preferences, and ample room for greenfield development in emerging markets should permit ongoing economic value creation at the parent level, with our 10-year average return on invested capital forecast of 45% (including goodwill) healthily exceeding our weighted average cost of capital estimate of 7%, though those figures are largely a byproduct of a heavily franchised operating model.

Underpinning our wide moat rating are the firm’s brand intangible assets, with strong brands driving same-store sales growth above inflation, while international results further attest to strength. Comparable sales at both KFC and Taco Bell have been impressive, with median annual growth of 3.5% and 4.7% during the past five years suggesting that each brand has been able to raise prices and attract customers despite heightened competitive pressure, including during a very difficult 2016, when industry price competition spiked. The firm's brand portfolio has also proved remarkably internationally portable, with roughly 60% of systemwide sales generated outside the U.S.—approximately $41 billion in 2022. Portable concepts and attractive unit economics have positioned Yum well to develop relationships with franchise partners, pushing higher unit and systemwide sales growth and reaching critical mass in new markets more quickly. While international markets are attractive for their ability to drive the unit growth narrative, they can also be quite lucrative for brands able to weather the lean early years of supply chain development, site selection, and customization to local tastes. KFC China earned mid-20s operating margins in the division’s early years, pointing to the importance of early market penetration and expansion into lower-tier cities and rural areas; now a low- to mid-teens percentage of operating income comes from the firm's royalty agreement with wide-moat Yum China.

Considering KFC, we believe that management’s decision to channel investment toward higher-return international units represents fiscal discipline and underpins the brand’s outperformance. KFC remains the primary top-line driver in the Yum portfolio, generating $1.2 billion in operating profit on $2.8 billion in revenue in 2022; this represents more than half of the firm’s operating profit and impressive mid-40s operating margins. While low-teens restaurant margins and higher buildout costs have slowed the firm’s domestic growth, strong results abroad make investments by third parties a more alluring proposition. As a result, the brand has generated annual unit growth of 5.3% since 2018, with comparable sales growth and productivity enhancements leading to system sales increases in the mid- to high single digits. Investments in a new e-commerce platform should help KFC to remain relevant in a world of increasing consumer expectations, defending the brand’s position as consumers demand omnichannel ordering capabilities, customization, and loyalty perks at the speed of want. The brand’s comparable sales growth has consistently outpaced inflation while outperforming the global limited-service competitive set in four of the last six years since 2016—particularly impressive given the negative impact from sales transfers as accelerated store openings cannibalize sales from existing units (which is not a bad thing, to the extent that service improves). We do expect more acute pressure from increasingly viable international category competitors like Popeyes or Jollibee to slow KFC's growth in the medium term, while Chick-fil-A continues to outperform the banner in its home market of the U.S. by a wide margin. Nevertheless, a durable international growth narrative and competitive enough cash-on-cash returns should cement robust profitability at the franchisor level, in our view.

Taco Bell is just starting to push international expansion—one of our measures of brand strength—with roughly 10% of its stores located outside the U.S. It scores very well in all other restaurant moat determinants: pricing power, unit-level profitability, and franchisee relationships. Taco Bell remains the only brand in the Yum portfolio consistently growing domestic market share. It benefits from rock-bottom food costs and a proliferation of alternative format stores (often featuring proportionately lower rents), allowing the Mexican chain to earn robust restaurant margins in the low to mid-20s. Taco Bell’s ability to generate excitement through menu innovation and promotional items, mixing as high as 10%-20% of sales, has rendered it quite popular with the millennial and Gen Z audience, while expansion in adjacent dayparts, like breakfast, has allowed the firm to push franchise average unit sales as high as $1.8 million in 2022. Finally, we anticipate that the firm’s commanding share in the Latin American limited-service market and limited overlap with its largest fast-casual competitor should moderate irrational promotional activity, allowing Taco Bell to preserve margins moving forward. Given its scale-driven cost advantage, we believe that persistent discounting by competitors like Del Taco and Qdoba is unlikely, with Taco Bell able to match or exceed price cuts while maintaining higher margins than lookalike peers. Further, we perceive limited overlap with wide-moat Chipotle's customer base, suggesting that the late-night concept's star should continue to shine brightly with very limited direct competitive pressure.

We view the Pizza Hut unit as a no-moat segment, though we anticipate that it will continue to provide excess returns (quantitatively) at the parent level to the extent that franchisees remain solvent, given very low capital requirements in a 99% franchised structure. While management’s emphasis on smaller delivery- and digital-oriented units are moves in the right direction, an inability to gain traction following the 2017 turnaround agreement does leave us skeptical. Pizza Hut saw 8 of 12 subsequent quarters result in flat or declining comparable sales following the investment, a far cry from results seen with similar efforts at KFC in 2015, leading us to infer that the Pizza Hut brand may be impaired. Weak company-owned restaurant-level margins of 4.9%, 0%, 5.6%, 3.9%, 6.8%, and negative 2.2% between 2017 and 2022 corroborate this view, curtailing franchisee interest in the firm's U.S. market, which still accounted for 41% of brand sales at year-end 2022. The bankruptcy of the firm’s largest franchisee, NPC International, also points to deteriorating unit economics, as Pizza Hut represented 75% of the operator's restaurant portfolio. Results from competitors do little to assuage our concerns, with Domino’s and Papa John’s enjoying nearly 20% restaurant-level margins during the halcyon days of pizza quick-service restaurant growth.

We believe that Yum Brands boasts a scale-driven cost advantage, with its Restaurant Supply Chain Solutions co-op leveraging the purchasing power of a conglomerate with $59 billion in systemwide sales in 2022 (second only to McDonald’s among restaurant chains, which had $116 billion). The firm’s scale allows it to command favorable pricing on commoditized food items in its basket, including chicken, beef, cheese, flour, and tomatoes, while offering the capability to invest heavily in its brands (with advertising revenue of $1.7 billion from franchisees in 2022), technology (including a point-of-sale tablet ordering system at Taco Bell and an e-commerce platform for KFC), and strategic acquisitions. Further, we believe that the largest QSR operators benefit from favorable commissions on third-party marketplace providers, such as Grubhub or Just Eat Takeaway, as their presence drives volume to the platforms and exposes QSR customers to more profitable (for the marketplace) independent restaurants. To this effect, wide-moat McDonald's agreements with narrow-moat DoorDash and Uber Eats see just low- to mid-teens commissions. Ultimately, we believe that Yum's cost edge dulls the pain from periods of hard discounting and intense industry competition, underpinning our wide-moat assessment and shoring up restaurant margins.

Wide

Economic Moat

YUM! Brands

TacoBell is an American chain of fast food restaurants based out of Irvine, California and a subsidiary of Yum! Brands, Inc. The restaurants serve a variety of Tex-Mex foods that include tacos, burritos, quesadillas, nachos, novelty and specialty items, and a variety of "value menu" items. As of 2018, Taco Bell serves more than 2 billion customers each year at 7,000 restaurants, more than 80 percent of which are owned and operated by independent franchisees and licensees.

Taco Bell

Wing Street is a restaurant chain specializing in chicken. The restaurant chain is owned by Yum! Brands, which also owns its sister franchises Taco Bell, Pizza Hut, and KFC. As of March 2014, there were close to 5,000 locations in the U.S. and Canada. They are always co-located with Pizza Hut.

Wing Street

Pizza Hut is an American restaurant chain and international franchise. The company is known for its Italian-American cuisine menu including pizza and pasta, as well as side dishes and desserts. Pizza Hut has over 16,000 locations worldwide as of 2015, making it the world's largest pizza chain in terms of locations. It is a subsidiary of Yum! Brands, Inc., one of the world's largest restaurant companies.

Pizza Hut

KFC is an American fast food restaurant chain that specializes in fried chicken. Headquartered in Louisville, Kentucky, it is the world's second-largest restaurant chain (as measured by sales) after McDonald's, with almost 20,000 locations globally in 123 countries and territories as of December 2015. The chain is a subsidiary of Yum! Brands, a restaurant company that also owns the Pizza Hut, Taco Bell, and WingStreet chains.

Yum! Brands, Inc. is a service restaurant company, which engages in the development, operation, franchise, and licenses of a system of restaurants. It operates through the following segments: KFC Division, Pizza Hut Division, Taco Bell Division, and Habit Burger Grill Division. The KFC Division segment consists of all operations of the KFC concept. The Pizza Hut Division segment operates the Pizza Hut concept. The Taco Bell Division segment includes all operations of the Taco Bell concept. The Habit Burger Grill Division segment includes its worldwide operations of the Habit Burger Grill concept. The company was founded in 1997 and is headquartered in Louisville, KY.

Earnings data Q1 2024

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Yum! Brands' (YUM) KFC collaborates with EG Group to boost sales and market dominance in the U.K. and Ireland.

Yum! Brands' (YUM) KFC to Boost Presence With New Buyout Deal

Yum Brands Inc.'s KFC division has agreed to acquire more than 200 KFC restaurants in the U.K. and Ireland from EG Group, the biggest franchisee in those countries. The deal “represents a significant opportunity to accelerate KFC's growth strategy in the large and growing UK and Ireland chicken market, with high average unit volumes and robust margins,” the companies said in a joint statement.

Yum's KFC division agrees to acquire more than 200 KFC restaurants in the UK and Ireland from franchisee EG Group

The pizza brand seeks to spread cheer this holiday season by giving 'out doormats featuring a QR code that will celebrate delivery drivers during the busiest time of the year PLANO, Texas , Dec. 6, 2023 /PRNewswire/ -- Last year, there were more than 11.7 billion mail pieces and packages delivered during the holiday season1; meaning every December, thousands of delivery drivers work extra hard to deliver joy to families across the country. Pizza Hut knows a thing or two about delivery, seeing that Pizza Hut drivers deliver customers over 110,000,000 pizzas every year.

LEAVE A BOX AND GET A BOX: PIZZA HUT LAUNCHES "REVERSE DELIVERY" DOORMAT TO GIFT PIZZA TO DELIVERY DRIVERS THIS HOLIDAY SEASON

Yum (YUM) reported earnings 30 days ago. What's next for the stock?

Why Is Yum (YUM) Up 1% Since Last Earnings Report?

Yum Brands is a high-quality, investment-grade company that may be undervalued by up to 24%. The company has shown stable growth and outperformed the S&P 500 over the past 10 years. YUM stock is well-positioned in its segment and is expected to exceed long-term growth targets.

Yum Brands: Undervalued And Poised For Long-Term Growth

LOUISVILLE, Ky.--(BUSINESS WIRE)--Yum! Brands, Inc. Declares Quarterly Dividend of $0.605 Per Share.

Yum! Brands, Inc. Declares Quarterly Dividend of $0.605 Per Share

KFC gears up to open its 1,000th restaurant in both India and Central & Eastern Europe, sharing its finger lickin' good chicken with even more of the world PLANO, Texas , Nov. 13, 2023 /PRNewswire/ -- KFC today announced key milestone store openings with two new restaurants in Haryana, India and Bucharest, Romania, as KFC expands in markets across the world. A new KFC opens somewhere in the world every 3.5 hours and in 2024, KFC plans to enter its 150th country.

KFC Celebrates Global Growth with Major Milestone Restaurant Openings

Turn Any Dish Into Pizza with Two New Seasoning Blends, Perfect for Holiday Gifting: 'Make it Pepperoni' and 'Everything Pizza' PLANO, Texas , Nov. 9, 2023 /PRNewswire/ -- Today, Pizza Hut announces a new collaboration hotter than a fresh-out-of-the-oven pizza: the Collectible Seasoning Duet Box Set. Designed in partnership with Chain, the LA-based pop-up phenomenon behind the much talked about Hut Hat, this collaboration features two brand new spice blends and a limited-edition shaker inspired by Pizza Hut's iconic lamps.

MOVE OVER BAGEL SEASONINGS, PIZZA HUT AND CHAIN TEAM-UP TO SPICE-UP ALL OF YOUR DISHES WITH NEW COLLECTIBLE 'SEASONING DUET' BOX SET

LOUISVILLE, Ky., Nov. 1, 2023 /PRNewswire/ -- With the holidays just around the corner, Kentucky Fried Chicken® is serving up extra joy this season with a new holiday bucket design and matching holiday merch collection.

KFC Has the Secret Recipe for Joy this Holiday Season: NEW Holiday Buckets and KFC Shop Holiday Collection!

Taco Bell's deals aided a 2% to 3% increase in customer transactions at the brand in the quarter, Yum Brands CEO David Gibbs said.

Taco Bell, KFC deals boost Yum Brands sales: ‘More pressure' on consumers

YUM! Brands (YUM) third-quarter 2023 results benefit from robust same-store sales and unit growth.

YUM! Brands' (YUM) Q3 Earnings Beat, Revenues Miss Estimates

Yum Brands is going all-in on data in its ongoing efforts to have “100% of sales powered by digital,” gearing up to combine insights across all its brands. On a third-quarter earnings call Wednesday (Nov.

Yum Brands to Leverage Cross-Brand Data Amid ‘100%' Digital Transformation

Yum! Brands (NYSE:YUM) shares dropped after reporting third-quarter revenue that fell short of analysts' expectations thanks to weak same-store sales growth at its franchise Pizza Hut.

Yum Brands shares dip on 3Q revenue miss, Pizza Hut sales decline

Yum! Brands, Inc. (NYSE:YUM ) Q3 2023 Earnings Call Transcript November 1, 2023 8:15 AM ET Company Participants Matt Morris - Head of Investor Relations David Gibbs - CEO & Director Christopher Turner - CFO Dave Russell - SVP and Corporate Controller Conference Call Participants David Tarantino - Robert W. Baird & Co. John Ivankoe - JPMorgan Chase & Co. David Palmer - Evercore ISI Andrew Charles - TD Cowen Brian Mullan - Piper Sandler Jon Tower - Citi Dennis Geiger - UBS Brian Harbour - Morgan Stanley Operator Hello all and welcome to Yum!

Yum! Brands, Inc. (YUM) Q3 2023 Earnings Call Transcript

The headline numbers for Yum (YUM) give insight into how the company performed in the quarter ended September 2023, but it may be worthwhile to compare some of its key metrics to Wall Street estimates and the year-ago actuals.

Here's What Key Metrics Tell Us About Yum (YUM) Q3 Earnings

Yum Brands Inc. YUM reported better-than-expected profit before market open Wednesday. The parent of Taco Bell, Pizza Hut and KFC fast-food restaurants earned $1.46 a share, up from $1.14 a share in the year-earlier period.

Taco Bell parent Yum Brands gets Q3 profit beat

Yum Brands on Wednesday reported third-quarter revenue that fell short of analysts' expectations, hurt by weak same-store sales growth at Pizza Hut.

Pizza Hut owner Yum Brands' revenue misses estimates

LOUISVILLE, Ky.--(BUSINESS WIRE)--Yum! Brands, Inc. (NYSE: YUM) today reported results for the third quarter ended September 30, 2023. Worldwide system sales, excluding foreign currency translation, grew 10%, with 6% same-store sales growth and 6% unit growth. Third-quarter GAAP operating profit grew 12% and third-quarter core operating profit grew 16%. Third-quarter GAAP EPS was $1.46 and third-quarter EPS excluding Special Items was $1.44. Third-quarter EPS includes a favorable $0.05 mark-to-.

Yum! Brands Reports Third-Quarter Results

Yum Brands (YUM) is seeing favorable earnings estimate revision activity and has a positive Zacks Earnings ESP heading into earnings season.

Is a Surprise Coming for Yum Brands (YUM) This Earnings Season?

Yum Brands Inc.'s Pizza Hut and Taco Bell are enjoying strong demand from consumers amid concerns about inflation, according to foot-traffic data from analytics company Placer.

Inflation hasn't taken a bite out of traffic to Yum Brands' Pizza Hut and Taco Bell, research shows

YUM! Brands' (YUM) third-quarter top line is likely to have benefited from strong same-store sales growth, Taco Bell performance and unit expansion efforts.

YUM! Brands (YUM) to Report Q3 Earnings: What's in the Offing?

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Yum (YUM) possesses the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

Yum Brands (YUM) Earnings Expected to Grow: Should You Buy?

New Campaign Celebrating the Launch Allows Customers to Use Girl Math Logic to Redeem a Free Item Value Menu Features 17 Different Items at Only $7 Each When Ordering Two or More, Including NEW: Roasted Garlic Cheese Sticks, Bacon Cheddar Cheese Sticks and Chocolate Donut Bites PLANO, Texas , Oct. 24, 2023 /PRNewswire/ -- Pizza Hut is launching a brand-new $7 Deal Lover's Menu featuring multiple Hut favorites including pizza, pastas, Pizza Hut Melts™, breadsticks, desserts, and more. Treat yourself to two or more items for $7 each, 7 days a week.

PIZZA HUT ANNOUNCES NEW $7 DEAL LOVER'S™ MENU WITH SEVERAL FAVORITES AT A PRICE WORTH LOVING

KFC adds a NEW Mac & Cheese Wrap to the lineup and introduces the family-sized Colonel's Homestyle Brownie LOUISVILLE, Ky., Oct. 23, 2023 /PRNewswire/ -- Starting Nov. 12 KFC is bringing back its fan-favorite Kentucky Fried Chicken Wraps, first introduced earlier this year, at the same finger lickin' good deal of two craveable wraps for just $5.

News for YUM! Brands Stock (YUM)