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

·5 min read

Yum! Brands, Inc. YUM will likely benefit from digital initiatives, unit expansion and strong Taco Bell performance. Also, the expansion of the Dragontail platform bodes well. However, pandemic-induced restrictions 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 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 the second quarter of 2022, the company launched Click & Collect functionalities, including QR code ordering (via the KFC app) in several Middle East markets. During the quarter, the company reported digital sales of more than $6 billion.

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. During the second quarter, the company expanded the global adoption of the platform to 28 markets across both KFC and Pizza Hut brands. Meanwhile, the company made significant progress concerning the rollout of digital order pickup shelves. To this end, the company added pickup shelves at Habit Burger Grill stores and Taco Bell. Given the emphasis on expanding options and ease of off-premise consumption, the company anticipates deploying pickup shelves across the rest of the system by early 2023.

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 second quarter of 2022, the company opened 781 gross units. The company reported solid developments in the KFC and Pizza Hut International divisions with approximate gross unit openings of 400 and 300, respectively. The company reported solid developmental contributions from each of its brands in China, India and the Middle East. 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. The company anticipates achieving a long-term unit growth of 4% to 5% in the upcoming periods.

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. In first-quarter 2022, comps increased 5% year over year. The momentum continued in second-quarter 2022, with Taco Bell comps increasing 8% year over year. Taco Bell recorded 46 gross new restaurant openings in second-quarter 2022. The company announced that it is focused on building momentum in different markets like the U.K., Spain and India.

Concerns

Zacks Investment Research
Zacks Investment Research


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So far this year, shares of the company have declined 18.8% compared with the Retail - Restaurants industry’s fall of 15%. The dismal performance was mainly due to the coronavirus crisis. During the second quarter of 2022, COVID-19 outbreaks and resulting government restrictions impacted sales in a few key markets, primarily in China. Although most dining services are open, traffic is still low compared with pre-pandemic levels. The company intends to monitor the situation regularly to gauge the impacts of COVID-19.

Moreover, the company has been continuously shouldering increased expenses, which have been detrimental to margins. During the second quarter of 2022, the company’s restaurant margin came in at 16.8%, down 300 basis points from 19.8% 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 $1,082 million compared with $1,035 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 Tecnoglass Inc. TGLS, Cracker Barrel Old Country Store, Inc. CBRL and Arcos Dorados Holdings Inc. ARCO.

Tecnoglass sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 24.4%, on average. Shares of the company have increased 1.5% in the past year.

The Zacks Consensus Estimate for Tecnoglass 2022 sales and earnings per share (EPS) suggests growth of 28.2% and 47.7%, respectively, from the year-ago period’s levels.

Cracker Barrel carries a Zacks Rank #2 (Buy). Cracker Barrel has a long-term earnings growth of 6.9%. Shares of the company have decreased 25% in the past year.

The Zacks Consensus Estimate for Cracker Barrel’s 2022 sales and EPS suggests growth of 16.3% and 15.4%, 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 31.7% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 27.1% and 104.2%, respectively, from the year-ago period’s levels.


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