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YUM! Brands (YUM) Banks on Digital Efforts Amid High Costs

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Yum! Brands, Inc. (YUM - Free Report) is likely to benefit from digital efforts, unit expansion and other sales-building initiatives. Also, increased focus on third-party delivery services bodes well. In the past three months, shares of the company have gained 8.8% compared with the Retail - Restaurants industry’s 7.6% growth.

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 continues to focus on various digital initiatives and refranchising efforts to help the company tide over the ongoing crisis.

Notably, the company continues to deploy technology to enhance guest experience. To this end, the company has implemented various digital features in mobile and online platforms across all brand segments. It is also continuing the transformation process toward a single point-of-sale system in the United States. Additionally, it updated its mobile app and Hut Rewards. At the end of third-quarter 2020, the company’s digital sales mix increased to more than 30% of system sales. 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 worldwide, YUM! Brands believes it can roughly triple its current global presence over the long term. During the third quarter, the company opened 556 gross new restaurants. It also opened restaurants in China, Asia, the United States, Russia and Thailand.

Moreover, master franchise agreements in Brazil (Taco Bell), Spain (Taco Bell) and Russia (Pizza Hut), and 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 pandemic affected the company’s operations in third-quarter 2020. Due to the crisis, the company and its franchisees experienced store closures and instances of reduced store-level operations, including lesser operating hours and dining-room closures. Moreover, restaurant traffic has been significantly impacted by 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 third-quarter 2020, the company’s restaurant expenses amounted to $399 million compared with $292 million in the year-ago quarter.

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 Brinker International, Inc. (EAT - Free Report) , Darden Restaurants, Inc. (DRI - Free Report) and Jack in the Box Inc. (JACK - Free Report) , each sporting a Zacks Rank #1.

Brinker has a trailing four-quarter earnings surprise of 116.6%, on average.

Darden has a three-five year earnings per share growth rate of 19.5%.

Jack in the Box 2021 earnings are expected to rise 7.5%.

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