Yum! Brands, Inc. (YUM Quick QuoteYUM - Free Report) will likely benefit from digital initiatives, solid comps growth and unit-expansion efforts. Also, the strength in Taco Bell’s performance bode well. However, commodity inflation is a concern.

Let us discuss the factors that highlight why investors should retain the stock for now.

Factors Driving Growth

Yum! Brands implemented various digital features in mobile and online platforms across all brand segments to enhance the guest experience. The company is accelerating its delivery services and the results have been positive. In second-quarter 2023, it reported digital sales of approximately $7 billion.

During the second quarter, the company emphasized developing its digital strategy and leveraging a new customer data platform solution to offer a single view of customers across all its U.S. brands and third-party aggregators. The initiative paves a path for heightened customer experience and frequency. This apart, the company reported an increase in the adoption of recommended ordering (across 800 stores) and Yum! point-of-sale system (1,000 Taco Bell U.S. stores). The company is optimistic regarding the advancements and anticipates the initiatives to unlock personalized marketing, joint branding and future automation for sales growth in the upcoming periods.

Despite the challenging macro environment, the company impressed investors with robust same-store sales growth in second-quarter 2023. The company reported consolidated same-store sales growth of 9% year over year. A rise in dine-in traffic, digital initiatives and strategic third-party partnerships primarily backed the upside. Also, attributes including unlocking additional customer use occasions, compelling value offerings and continued digital growth added to the positives. During the quarter, same-store sales at Taco Bell, KFC and Pizza Hut rose 4%, 13% and 4% year over year, respectively. Given the emphasis on consumer value proposition, expanded digital access and franchise partners, the company anticipates the momentum to continue in the upcoming periods.

The company continues to focus on expansion efforts to drive growth. Considering its existing footprint of more than 50,000 restaurants worldwide, YUM! Brands believes it can nearly triple its current global presence over the long term. During the second quarter of 2023, the company opened 1,025 stores, resulting in a 6% unit growth on a year-over-year basis. The company reported solid developmental contributions from Pizza Hut brand in China, India, the U.S., Spain and Turkey. It also reported positive feedback from its franchise partners, envisioning broad consumer appeal and a huge untapped market opportunity. The company is optimistic with respect to its development engine and anticipates it to be a driving factor in the upcoming periods.

YUM! Brands is benefiting from increased contributions from Taco Bell. During second-quarter 2023, Taco Bell's revenues were $621 million, up 6% from the year-ago quarter's levels. The upside was primarily backed by same-store sales growth (of 4%) and unit growth (5%). Also, the emphasis on commercial strategies, including building brand buzz, mass occasions and digital initiatives, bode well. During the quarter, the company reported solid demand with respect to crave-able product offerings, including $5 Cravings Creo and Deluxe Build Your Own Cravings Box. It also announced the migration of Taco Bell U.S. digital traffic to the Yum! Commerce platform. During the quarter, Taco Bell's International system sales grew 18% year over year courtesy of continued development momentum and strong value propositions (through menu innovation offerings). Given the emphasis on consumer value proposition, expanded digital access and franchise partners, the company anticipates the momentum to continue in the upcoming periods.

Image Source: Zacks Investment Research

In the past year, the company’s shares have gained 12.2% compared with the Retail – Restaurants industry’s 6.7% growth.

Concerns

The company has been continuously shouldering increased expenses, which have been detrimental to margins. In second-quarter 2023, its net costs and expenses amounted to $1,114 million compared with $1,082 million reported in the prior-year quarter. The transfer of business and exit from Russia incorporated certain additional costs, which hurt the company's margins. Also, spikes in labor costs and commodity inflation added to the downside. Costs associated with brand positioning in all key markets and ongoing investment in initiatives will likely dent margins in the near term. For 2023, our model predicts total costs and expenses to rise 3.8% year over year to $4,834 million. The company is cautious of uncertain macro environment.

Zacks Rank & Key Picks

Yum! Brands currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Retail-Wholesale sector are:

BJ's Restaurants, Inc. (BJRI Quick QuoteBJRI - Free Report) sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 121.2%, on average. Shares of BJRI have increased 14% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for BJRI’s 2023 sales and EPS indicates 5.6% and 435.3% growth, respectively, from the year-ago period’s levels.

Arcos Dorados Holdings Inc. (ARCO Quick QuoteARCO - Free Report) currently carries a Zacks Rank #2 (Buy). ARCO has a long-term earnings growth rate of 11.4%. The stock has gained 32.6% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2023 sales and EPS indicates 19% and 13% growth, respectively, from the year-ago period’s levels.

Chuy's Holdings, Inc. (CHUY Quick QuoteCHUY - Free Report) carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 26.6% on average. Shares of CHUY have increased by 63.1% in the past year.

The Zacks Consensus Estimate for CHUY’s 2023 sales and EPS indicate an increase of 9.5% and 32.9%, respectively, from the year-ago period’s levels.