Yum! Brands’ stock has nearly doubled in the past half-decade. The Louisville, Kentucky-based restaurant behemoth owns Pizza Hut, KFC, Taco Bell and WingStreet. All in all, Yum! rakes in nearly $6 billion in revenue per year.
Priced at $109 per share, Yum! Seems like a shaky investment at first glance simply because the coveted millennial age cohort does not have much of a penchant for unhealthy fast food. However, there is no denying Yum! restaurants are fast, convenient and affordably priced for cash-strapped workers in need of sustenance on-the-go. Let’s take a look at whether Yum! is worth your hard-earned money.
Taco Bell or Taco Hell?
Yum! has taken an unconventional approach to hiring for its Taco Bell stores by hosting hiring parties. The company offers free food to those who attend these get-togethers in hopes that they will accept job offers and stick with the company for at least a year or two. Taco Bell sales are up as a whole.
To the surprise of many, the taco chain’s sales are growing faster than Yum!’s Pizza Hut and KFC restaurants. However, it remains to be seen if Taco Bell can hold onto its market share when the likes of Chipotle and QDOBA are making significant progress. Though Taco Bell’s offerings are cheaper than QDOBA’s and Chipotle’s, the quality is not the same. Ask anyone who frequents these three restaurants about which has the tastier offerings, and you will find the overwhelming majority favor QDOBA and Chipotle over Taco Bell.
Yum! by the Numbers
Yum! same-store sales are up about 2% while system-wide sales have increased 5%. All in all, Yum! unit counts are up 4%. Unfortunately, revenue is sliding, down 3%, partially due to the company’s effort to re-franchise restaurants. It must be noted the all-important same-store sales are not the same across the board; Pizza Hut’s same-store sales are down, while KFC’s are up 3% and Taco Bell’s spiked 5%. Pizza Hut is gradually losing market share to competitors such as Domino’s. However, Yum! continues to open more and more stores with each passing quarter.
The Yum! Business Model
Most investors are unaware of the fact that Yum! does not operate the bulk of its restaurants. Rather, Yum! Is the owner of those restaurants’ brands. This unique business model is part of what makes Yum! so intriguing from an investing perspective.
Yum! can sell its franchise brand across posterity while maintaining sky-high margins. The same cannot be said of a company that owns physical products. Part of Yum!’s success is attributable to the fact that third-party operators front the money necessary to construct restaurants. This business model empowers Yum! to use its money in other strategic ways such as stock repurchases, dividends and acquisitions.
Yum! will likely continue to enjoy great success selling its brand, collecting franchise fees, and generating seemingly endless recurring revenue. However, Yum! is not the same as Yum China Holdings (YUMC). Yum! does not own the aforementioned fast food chains in China. Yum China was spun off three years ago, and functions as a traditional owner-operator. Alternatively, Yum! receives royalty checks in accordance with a predetermined percentage of revenue without making a significant capital investment.
What Does the Future Look Like for Yum! Brands?
The question is whether Yum!’s solid numbers will continue in the years ahead as the masses shift away from greasy fast food comprised of environmentally-destructive meat in favor of healthy meat substitutes. Yum! deserves credit for developing plant-based chicken at its KFC restaurants.
Though it might be several years until KFC serves up fake chicken in plant form, these environmentally-friendly options are coming down the company’s pipeline. There is no reason for investors to be skittish about investing in a company willing to make the transition away from meat to meat substitutes. After all, Beyond Meat’s stock (BYND) soared in recent weeks.
If Yum! expands its plant-based offerings beyond KFC in the future, shareholders will benefit in due time. Alternatively, if Yum! scraps its plant-based chicken experiment and sticks to meat-only options at its popular restaurants, the company will gradually lose market share to competitors like QDOBA, Burger King, and Tim Hortons that are phasing in vegan options. Yum! investors should be cautiously optimistic. If Yum! demonstrates it is willing to change with the times, it qualifies as a strong buy.
Regards,
Ethan Warrick
Editor
Wealth Authority
