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YUM! Brands Strategic Plans Bode Well: Should You Hold?

Zacks Equity Research

YUM! Brands, Inc. YUM is riding high on its strategic transformation plan at KFC, Pizza Hut and Taco Bell brands, robust earnings trend and enhanced digital & delivery services. Evidently, shares of the company have gained 19.1% in the past six months, outpacing the industry’s collective growth of 9.7%.

However, high costs related to restaurant operations and sales decline due to refranchising are near-term concerns for the company. Let’s delve deeper and find out the factors that substantiate the company’s Zacks Rank #3 (Hold).

Key Catalysts

Yum! Brands’ three-year strategic transformation plan to boost growth at KFC, Pizza Hut and Taco Bell brands bode well for the company. Notably, this transformation and growth initiative involves greater focus on the development of its three iconic global brands, increasing its franchise ownership and creating a leaner, more efficient cost structure. It is also focusing on restaurant development to drive continued growth.

Meanwhile, 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 the race as the company is consistently making efforts to transform into a single point-of-sale system in the United States.

In the mobile and online platforms, the company has already implemented various digital features across all its brand segments to enhance guest experience. Yum! Brands have also worked toward making its delivery services swifter, and the initial results so far have been positive.

To enhance its delivery services, the company announced Pizza Hut’s partnership with Toyota that will facilitate delivery of pizzas via driverless vehicles, showcasing innovation for both the companies.

Already, Yum Brands’ efforts started to reap benefits as is evident from its positive stock price movement. The share price appreciation can be attributable to better-than-expected earnings in 11 out of the past 12 quarters. The company also has a trailing four-quarter average positive earnings surprise of 22.1%. In the third quarter of 2018, adjusted earnings of $1.04 per share surpassed the Zacks Consensus Estimate of 83 cents. Further, the bottom line increased 52.9% on a year-over-year basis.

Concerns

Yum! Brands’ revenues in the third quarter decreased 3.1% year over year on account of sales decline due to the company’s continued refranchising initiatives. While the de-risking strategy of the company to reduce the ownership of restaurants by expanding franchise is expected to negatively impact revenues in the near term, it is likely to boost earnings.

Further, an increase in the cost of employee wages, benefits and insurance as well as other operating costs such as rent and energy costs have significantly hurt the company’s margins.  A competitive retail environment also puts pressure on the restaurants’ costs.

Key Picks

Better-ranked stocks worth considering in the same space include Bojangles', Inc. BOJA, The Habit Restaurants, Inc. HABT and BJ's Restaurants, Inc. BJRI. All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Bojangles', Habit Restaurants and BJ's Restaurants has an impressive long-term earnings growth rate of 12.5%, 20% and 14.5%, respectively.

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