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Yum! Brands (YUM) Gains from Refranchising, High Costs Rife
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Yum! Brands’ (YUM - Free Report) robust efforts to enhance digital capabilities, refranchising attempts and transformation strategies continue to be encouraging. However, higher costs continue to hurt the company’s profits. Also, macroeconomic headwinds and unfavorable currency translation might limit the company’s revenue growth.
Last month, Yum! Brands reported mixed fourth-quarter 2017 results, beating the Zacks Consensus Estimate on earnings but missing the same on revenues.Adjusted earnings of 96 cents per share surpassed the Zacks Consensus Estimate of 80 cents. Further, earnings increased 21.5% year over year. The shift to refranchising substantially boosted the company’s operating margin and earnings per share, and the trend is expected to continue.
Notably, the company’s shares have gained 22.2% in the past year, outperforming the industry’s gain of 11.7%.
Let’s look into the strengths and risks associated with the company.
Digital Initiatives Drive Top-Line Growth
Yum! Brands had undertaken a three-year strategic transformation plan to drive growth at KFC, Pizza Hut and Taco Bell brands that involve employing greater focus on the development ofits three iconic global brands. To build traffic through greater consumer satisfaction, the company is continuously developing digital and technological capabilities.
Advanced technological implementations to improve guest experience are also proving to be fruitful for the company’s international business. Yum! Brands believes in maximizing consumer satisfaction to drive revenues.
To this end,the company is focusing on building a superlative loyalty program with a large and growing database to help drive future sales. We believe that these initiatives will drive traffic and comps in the coming quarters.
In fourth-quarter 2017, Yum! Brands announced a partnership with online food-delivery platform Grubhub to enhance online sales and delivery from its restaurants. Additionally, the company implemented various digital features in mobile and online platforms in the fourth quarter across all its brand segments to improve guest experience. To enhance its delivery services, the company announced Pizza Hut’s partnership with Toyota that will facilitate delivery of pizzas via driverless vehicles, showcasing innovation for both the companies.
Refranchising Aids Earnings
Yum! Brands has adopted a de-risking strategy by reducing its ownership of restaurants through refranchising. In fourth-quarter 2017, the company increased its franchise ownership to 97%. It is committed toward becoming at least 98% franchised and to possess less than 1,000 company-owned restaurants by the end of 2018.
Refranchising a large portion of the system reduces the company’s capital requirements and facilitates earnings per share growth and higher Return on Equity (ROE). Alongside, free cash flow will continue to grow, facilitating reinvestments to increase brand recognition and shareholder return. Remarkably, this shift to refranchising has substantially benefited the company’s operating margin over the years.
High Costs & Unfavorable Currency as Potential Headwinds
Due to continual expansion in international markets, the company is highly exposed to various macroeconomic headwinds. Thus, the company’s earnings remain highly vulnerable to fluctuations in exchange rates.
Also, an increase in the cost of employee wages, benefits and insurance, as well as other operating costs such as rent and energy costs have led to a significant pressure on the company’s margins. A competitive retail environment also puts pressure on the restaurants’ costs.
BJ’s, Brinker and Darden’s earnings for 2018 are expected to increase 27%, 6.6% and 18.4%, respectively.
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Image: Bigstock
Yum! Brands (YUM) Gains from Refranchising, High Costs Rife
Yum! Brands’ (YUM - Free Report) robust efforts to enhance digital capabilities, refranchising attempts and transformation strategies continue to be encouraging. However, higher costs continue to hurt the company’s profits. Also, macroeconomic headwinds and unfavorable currency translation might limit the company’s revenue growth.
Last month, Yum! Brands reported mixed fourth-quarter 2017 results, beating the Zacks Consensus Estimate on earnings but missing the same on revenues.Adjusted earnings of 96 cents per share surpassed the Zacks Consensus Estimate of 80 cents. Further, earnings increased 21.5% year over year. The shift to refranchising substantially boosted the company’s operating margin and earnings per share, and the trend is expected to continue.
Notably, the company’s shares have gained 22.2% in the past year, outperforming the industry’s gain of 11.7%.
Let’s look into the strengths and risks associated with the company.
Digital Initiatives Drive Top-Line Growth
Yum! Brands had undertaken a three-year strategic transformation plan to drive growth at KFC, Pizza Hut and Taco Bell brands that involve employing greater focus on the development ofits three iconic global brands. To build traffic through greater consumer satisfaction, the company is continuously developing digital and technological capabilities.
Advanced technological implementations to improve guest experience are also proving to be fruitful for the company’s international business. Yum! Brands believes in maximizing consumer satisfaction to drive revenues.
To this end,the company is focusing on building a superlative loyalty program with a large and growing database to help drive future sales. We believe that these initiatives will drive traffic and comps in the coming quarters.
In fourth-quarter 2017, Yum! Brands announced a partnership with online food-delivery platform Grubhub to enhance online sales and delivery from its restaurants. Additionally, the company implemented various digital features in mobile and online platforms in the fourth quarter across all its brand segments to improve guest experience. To enhance its delivery services, the company announced Pizza Hut’s partnership with Toyota that will facilitate delivery of pizzas via driverless vehicles, showcasing innovation for both the companies.
Refranchising Aids Earnings
Yum! Brands has adopted a de-risking strategy by reducing its ownership of restaurants through refranchising. In fourth-quarter 2017, the company increased its franchise ownership to 97%. It is committed toward becoming at least 98% franchised and to possess less than 1,000 company-owned restaurants by the end of 2018.
Refranchising a large portion of the system reduces the company’s capital requirements and facilitates earnings per share growth and higher Return on Equity (ROE). Alongside, free cash flow will continue to grow, facilitating reinvestments to increase brand recognition and shareholder return. Remarkably, this shift to refranchising has substantially benefited the company’s operating margin over the years.
High Costs & Unfavorable Currency as Potential Headwinds
Due to continual expansion in international markets, the company is highly exposed to various macroeconomic headwinds. Thus, the company’s earnings remain highly vulnerable to fluctuations in exchange rates.
Also, an increase in the cost of employee wages, benefits and insurance, as well as other operating costs such as rent and energy costs have led to a significant pressure on the company’s margins. A competitive retail environment also puts pressure on the restaurants’ costs.
Zacks Rank & Stocks to Consider
Yum! Brands carries a Zacks Rank #3 (Hold).
A few better-ranked stocks in the U.S. restaurant space include BJ's Restaurants (BJRI - Free Report) , Brinker International (EAT - Free Report) and Darden Restaurants (DRI - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
BJ’s, Brinker and Darden’s earnings for 2018 are expected to increase 27%, 6.6% and 18.4%, respectively.
Don’t Even Think About Buying Bitcoin Until You Read This
The most popular cryptocurrency skyrocketed last year, giving some investors the chance to bank 20X returns or even more. Those gains, however, came with serious volatility and risk. Bitcoin sank 25% or more 3 times in 2017.
Zacks’ has just released a new Special Report to help readers capitalize on the explosive profit potential of Bitcoin and the other cryptocurrencies with significantly less volatility than buying them directly.
See 4 crypto-related stocks now >>