Shares of Yum! Brands, Inc. (YUM Quick QuoteYUM - Free Report) outperformed the Zacks categorized Retail–Restaurants industry and grew 18.1% since the beginning of the year to Oct 31, while the industry declined nearly 4%.

However, the spin-off of the company’s China division into an independent, publicly-traded company on Oct 31, impeded the momentum. Post separation, shares of the company underperformed the broader industry by recording a decline of 26.2% till today, as against the industry’s growth of 5.6%.

However, the company is undertaking various efforts to subsidize the effects of the spin-off. One such attempt in this direction is refranchising a major portion of its business.



With the third-quarter earnings release, the company revealed that it aims to be 96% franchised by the end of 2017. Further, in a conference a week later, the company announced its plan to be 98% franchised by the end of 2018.

It announced that a “slimmer Yum Brands” would lead to efficiency gains. Management expects to cut capex spending to about $100 million by 2019 and also reduce General and Administrative (G&A) expenditure by approximately $300 million. Capital spending (excluding acquisitions and investments) at the end of last fiscal year was $973 million, while G&A was $1.5 billion.

Notably, the shift to refranchising has substantially benefited the company’s operating margin over the years. Refranchising a large portion of the system reduces a company’s capital requirements and facilitates earnings per share growth and Return on Equity expansion. Alongside, free cash flow continues to grow, facilitating reinvestments to increase brand recognition and shareholder return.

In keeping with this strategy, Yum! Brands recently announced its plans to refranchise its KFC restaurant business in Turkey. In 2015, the company had revealed plans to add 400 KFC restaurants in Turkey over the next five years, while the current figure stands at 104 units, per its Turkish division website.

Moreover, at the beginning of the month, the company also announced its U.K refranchising plans whereby it plans to sell most of its KFC outlets in the region. It franchises about 600 restaurants in the area and is considering this as its most suitable long-term strategy for the U.K too.

Thus, Yum! Brands expects to become a "pure play" franchisor with more stable earnings, higher profit margins, lower capital requirements and stronger cash flow conversion.

Though the company’s efforts to revive business along with various sales and digital initiatives bode well, the China business accounted for more than half of the company’s total revenue and played a pivotal role in its solid performance over the last few years. Thus, it remains to be seen how profitable the recent endeavors turn out to be and whether they can uplift the currently Zacks Rank #5 (Strong Sell) rated company.

Stocks to Consider

Here are some well-performing restaurant stocks you can consider at the moment:

Bob Evans Farms, Inc.’s shares have returned 37.8% year to date, while the broader industry gained 1.4%. It sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Dave & Buster’s Entertainment, Inc. (PLAY Quick QuotePLAY - Free Report) – a Zacks Rank #1 company – has a positive record of earnings surprises in each of the reported quarters since its IPO in Oct 2014.

Papa John’s International, Inc. (PZZA Quick QuotePZZA - Free Report) carries a Zacks Rank #2 (Buy) and is expected to witness a 19.9% increase in full-year 2016 earnings while the industry is expected to grow 6.6%.

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