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Here's Why You Should Retain YUM! Brands (YUM) Stock Now

·4 min read

Yum! Brands, Inc. YUM is likely to benefit from unit expansion, strong performance of Taco Bell and digital initiatives. However, geopolitical tensions and commodity and wage inflation are a concern.

Let us discuss the factors highlighting why investors should hold on to the stock for the time being.

Factors Driving Growth

YUM! Brands 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 first quarter of 2022, the company opened 997 gross units. The company reported solid developments in the KFC and Pizza Hut International divisions with gross unit openings of 587 and 283, respectively. The company reported solid developmental contributions from each of its brands in India, Asia, the Middle East and Latin America. Going forward, the company intends to focus on master franchise agreements in Brazil (Taco Bell) and Spain (Taco Bell) and an international growth alliance with Telepizza (to accelerate the development of Pizza Hut in key European markets) and consolidate franchisees in Latin America to drive growth.

Taco Bell continues to impress investors with robust same-store sales. The company’s comps climbed 21%, 5% and 9% during the second, third and fourth quarters of 2021, respectively. The momentum continued in first-quarter 2022, with Taco Bell comps increasing 5%. Taco Bell recorded 63 gross new restaurant openings in first-quarter 2022. The company announced that it is focused on building momentum in markets like the U.K., Spain and India.

Yum! Brands implemented various digital features in mobile and online platforms across all brand segments to enhance the guest experience. The company has been working toward accelerating its delivery services and the results have been positive. During first-quarter 2022, the company reported digital sales of more than $6 billion, up 15% year over year. The company has been benefitting from the acquisition of Dragontail Systems. The initiative allows the company to tap the powers of artificial intelligence to streamline the end-to-end food preparation process and improve its delivery capabilities. Backed by positive results in certain markets, the company intends to expand this cutting-edge platform across its franchisees in the United States.

In the past year, shares of the company have declined 4.2% compared with the Retail - Restaurants industry’s fall of 20.5%.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Concerns

The company’s operations are likely to be influenced by uncertainties related to the Russian invasion of Ukraine. The company had announced the suspension of all investments and restaurant development efforts in Russia and operations of company-owned KFC restaurants. The company has reached an agreement with its Pizza Hut master franchisee to suspend all restaurant operations in that brand. Also, it initiated transferring ownership to local operators. Going forward, the company intends to monitor developments in Russia, as chances of regional instability and heightened economic sanctions (from the U.S.) cannot be ruled out.

Moreover, the company has been continuously shouldering increased expenses, which have been detrimental to margins. During the first quarter of 2022, the company’s restaurant margin came in at 21.9%, down 220 basis points from 24.1% reported in the prior-year quarter. The downside was primarily driven by commodity and wage inflation and partially offset by same-store sales growth. Net costs and expenses during the quarter amounted to $1,038 million compared with $943 million reported in the prior-year quarter. We believe that costs associated with brand positioning in all key markets and ongoing investments in initiatives are likely to weigh on margins in the near term.

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 Zacks Retail-Wholesale sector are Dollar Tree Inc. DLTR, BBQ Holdings, Inc. BBQ and Arcos Dorados Holdings Inc. ARCO.

Dollar Tree sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 13.1%, on average. Shares of the company have gained 53.5% in the past year.

The Zacks Consensus Estimate for Dollar Tree’s 2022 sales and earnings per share (EPS) suggests growth of 6.7% and 40.5%, respectively, from the year-ago period’s levels.

BBQ Holdings carries a Zacks Rank #2 (Buy). BBQ Holdings has a long-term earnings growth of 14%. Shares of the company have decreased 19% in the past year.

The Zacks Consensus Estimate for BBQ Holdings’ 2022 sales and EPS suggests growth of 46.1% and 67.6%, respectively, from the year-ago period’s levels.

Arcos Dorados carries a Zacks Rank #2. Arcos Dorados has a long-term earnings growth of 34.4%. Shares of the company have risen 13.9% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 16.6% and 83.3%, respectively, from the year-ago period’s levels.


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