YUM! or YUM?
Louisville, Kentucky is home to Louisville Slugger, the Cardinals, and Yum! Brands Inc. (YUM). Formerly known as Tricon Global Restaurants, Yum! is one of the worlds largest fast food restaurant companies. Yum! is best known for being the parent company of ubiquitous fast food stops like KFC, Pizza Hut, WingStreet, and Taco Bell. As of 2020, the organization operated 50,170 restaurants in 152 countries around the world, 49,166 of which were franchisee-operated. In 2019, Yum! generated $1.9 billion in operating income and $2.1 billion in EBITDA on $5.6 billion in revenues, and currently holds a market capitalization of ~$28.1 billion. Shares of the company have performed very well over the five years prior to November 2019, when prices slipped due to an underwhelming earnings report and then continued to fall in early 2020 as the impact of COVID-19 began to materialize. Shares have rebounded alongside the broader market, but Yum! has not yet reached its 2019 highs.
Primarily, Yum! Brands is engaged in and concerned with the development, franchising, and licensing of new franchise locations; a fact illustrated by the low overall % of Yum! locations that are operated by the organization. Each Pizza Hut, KFC, or Taco Bell location that is opened by a Yum! brands franchisee generates licensing and franchise fees for Yum! Brands, which provides marketing services, menu development, and operational advice to franchisees in return. These fee revenues represented ~45% of Yum!’s total revenues in 2019, highlighting the relationship between franchise location count and overall financial performance for Yum!. Like many mature businesses in the modern era, Yum! is making a concerted push towards digitization, delivery, and international expansion. For Yum! portfolio brands, this means developing online ordering infrastructure, investing in digital customer experience, and partnering with the food delivery app GrubHub (GRUB) to speed delivery service times. Combined with management’s belief that Yum! can increase its global footprint threefold in the long run, Yum! certainly has potential to continue to grow at a competitive rate.
Concerning, though, is the impact of the coronavirus on the company’s performance in 2020. The shuttering of businesses across the globe resulted in same store sales declining 15% during Q2 2020, and despite investment in digital platforms, revenues at Pizza Hut locations have been unreliable. These results are reflected in Yum!’s Growth and Scalability ratings which betray -8.5% year over year revenue growth through Q2 2020. However, Yum! is making a concerted effort to reform its Pizza Hut brand with an increased focus on carry out and delivery sales and a lower emphasis on buffet and dine-in options.
Looking forward, investors interested in Yum! shares should track the company’s same store sales numbers to gauge the degree to which the impact of the virus on Yum!’s business is increasing or decreasing. Another area to watch is management communication related to the refocus of the Pizza Hut brand and the rollout of improved digital services designed to make ordering delivery or takeout easier for consumers. Lastly, the number of franchised locations Yum! plans to open in the short term will serve as a proxy for the company’s revenue base in the short-to-medium term, which means delays in expansion plans are likely to dampen the performance of shares. Interestingly (and perhaps tellingly) Yum! Brands operations in China trade under a different stock ticker (YUMC). Investors seeking exposure to China’s growing demand for fast food should focus their attention on this alternative asset. While the two assets tend to trade in close alignment, it’s always possible that China suddenly develops a national craving for fried chicken.
Source: Yum! Form 10K 2019