Yum! Brands, Inc. YUM is experiencing strong same-store sales growth, successful expansion initiatives and a thriving digital transformation, all of which are contributing positively to its performance. As a result, the stock has seen a 12.7% rise over the past year, outperforming the industry's 11% growth. Nonetheless, YUM continues to grapple with elevated cost-related challenges.
The Zacks Rank #3 (Hold) company has an impressive long-term earnings growth rate of 12.6%. In the past 60 days, earnings estimate for 2023 has witnessed upward revision of 2.4% to $5.19 per share. The company’s earnings and sales in 2023 are likely to witness improvements of 15.1% and 5.9% year over year, respectively.
Factors Driving Growth
Despite the challenging macro environment, YUM impressed investors with robust same-store sales growth in second-quarter 2023. It reported consolidated same-store sales growth of 9% year over year. The upside was primarily backed by a rise in dine-in traffic, digital initiatives and strategic third-party partnerships.
During the quarter, same-store sales at Taco Bell, KFC and Pizza Hut rose 4%, 13% and 4% year over year, respectively. YUM has been benefiting from a recovery in emerging markets. Given its focus on consumer value proposition, expanded digital access and franchise partners, management anticipates the momentum to continue in the upcoming periods.
The company is also benefiting from strong expansion efforts. Considering its existing footprint of 55,361 restaurants worldwide, YUM! Brands believes it can roughly triple its current global presence over the long term.
Yum! Brands implemented various digital features in mobile and online platforms across all brand segments to enhance guest experience. It has been working toward accelerating its delivery services and the results have been positive so far. In second-quarter 2023, it reported digital sales of approximately $7 billion.
Moreover, YUM reported solid adoption of Dragontail Systems. The initiative paves a path to tap the powers of artificial intelligence to streamline the end-to-end food preparation process as well as improve its delivery capabilities. The company expanded its global adoption of the platform to 28 markets across both KFC and Pizza Hut brands.
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An increase in the cost of employee wages, benefits and insurance, and other operating expenses such as rent and energy expenditures put significant pressure on the company’s margins. A competitive retail environment weighed on the restaurants’ costs. YUM is susceptible to profit margin pressure due to relentless expansion.
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 its margins. Expenses associated with brand positioning in all key markets and ongoing investment initiatives are likely to weigh on margins in the near term.
Management remains cautious of the uncertain macro environment. For 2023, our model predicts total costs and expenses to rise 3.8% year over year to $4,834 million.
Below we present some better-ranked stocks in the Zacks Retail-Wholesale sector.
Carrols Restaurant Group, Inc. TAST sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter earnings surprise of 67.9%, on average. Shares of TAST have surged 291.2% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for TAST’s 2023 sales and earnings per share (EPS) indicates 8.1% and 152.9% growth, respectively, from the year-ago period’s levels.
BJ's Restaurants, Inc. BJRI flaunts a Zacks Rank #1. It has a trailing four-quarter earnings surprise of 121.2%, on average. Shares of BJRI have increased 1.9% in the past year.
The Zacks Consensus Estimate for BJRI’s 2023 sales and EPS implies improvements of 5.6% and 447.1%, respectively, from the year-ago period’s levels.
Arcos Dorados Holdings Inc. ARCO currently carries a Zacks Rank #2 (Buy). ARCO has a long-term earnings growth rate of 11.4%. The stock has gained 39.1% in the past year.
The Zacks Consensus Estimate for Arcos Dorados’ 2023 sales and EPS suggests rises 19.2% and 13%, respectively, from the year-ago period’s levels.
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