YUM! Brands, Inc. (YUM - Free Report) looks promising on the back of its effort to drive growth by developing its three iconic global brands and creating a more efficient cost structure. In the past year, shares of the company have rallied 22.2%, outperforming the industry’s increase of 4.8%. However, the stock recently came under pressure after the company’s comps growth came in below the analyst expectations. Let’s delve deeper.
In the first quarter of 2018, Yum Brands’ completed the second year of its transformation journey. By relying extensively on the four key drivers of growth — distinctive, relevant and easy brands; unmatched franchise operating capability; bold restaurant developments; and unrivaled culture and talent — the company remains on track to achieve its target.
Additionally, the digital wave has hit the U.S. fast casual restaurant sector. More and more restaurants are deploying technology to enhance guest experience. Yum! Brands is also not far behind in this race as the company seems to continue with its transformation process toward a single point-of-sale system in the United States. Evidently, in fourth-quarter 2017, Yum! Brands announced a partnership with online food delivery platform, Grubhub, to enhance online sales and delivery from its restaurants. The company has started integrating all KFC and Taco Bell restaurants with Grubhub in the first quarter.
Furthermore, this Zacks Rank #3 (Hold) company has adopted a de-risking strategy by reducing its ownership of restaurants through refranchising. In first-quarter 2018, Yum Brands’ had franchise ownership of 97% and is committed toward becoming at least 98% franchised. It expects to possess less than 1,000 company-owned restaurants by the end of 2018.
We believe that refranchising a large portion of the system reduces the company’s capital requirements and facilitates earnings per share growth and ROE expansion. Additionally, 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. Also, it has helped Yum Brands’ to post year-over-year growth in earnings over the past few quarters. Moreover, the company’s earnings have surpassed the Zacks Consensus Estimate in the trailing six quarters.
Despite reporting better-than-expected results in the first-quarter 2018 the company’s shares recently came under pressure after its comps growth of 1% came in below the analyst expectations.
Additionally, the company is highly exposed to various macroeconomic headwinds due to continual expansion in international markets. Therefore, Yum Brands’ 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 remain concerns for the company. A competitive retail environment might hurt the restaurants’ costs as well.
Stocks to Consider
Some better-ranked stocks in the same space are Brinker International, Inc. (EAT - Free Report) , Del Taco Restaurants, Inc. (TACO - Free Report) and Denny's Corp. (DENN - Free Report) . All these stocks has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Brinker International has a long-term earnings growth rate of 10.9%.
Del Taco Restaurants has an impressive long-term earnings growth rate of 15.8%.
Denny's has reported better-than-expected earnings in the preceding two quarters.
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