Yum Brands Is Moving In the Right Direction
Yum Brands, Inc. (NYSE:YUM), which owns well-known restaurant brands such as KFC, Pizza hut, Taco Bell and The Habit Burger Grill, has recovered well from the economic recession. The company claims ownership of around 50,000 restaurants in more than 150 countries and generates revenue from its own restaurants and franchise fees.
According to company filings, 98% of units are operated as independent franchises. Having separated from the company in October 2016, Yum China (YUMC), which is the largest restaurant chain in China, operates as a trademark licensee of Yum Brands and pays 3% of total systemwide sales to the company. The company seems well-positioned to benefit from favorable macroeconomic trends in 2022.
Earnings recap
In its most recent earnings results for the third quarter of 2021, Yum Brands reported an 11% year-over-year increase in revenue to $1.6 billion, aided by its franchise business and property revenues. Excluding foreign currency translation, worldwide system sales increased 8% as Taco Bell, KFC and Pizza Hut systemwide sales increased 8%, 11% and 4%, respectively.
Looking at its reporting segments, for the third quarter of 2021, revenue from KFC totaled $692 million, up 18% year-over-year as the company opened 636 gross new restaurants in the quarter. Pizza Hut revenue was up 2% on a year-over-year basis to $247 million, and the operating margin of this segment expanded 390 basis points, led by higher same-store sales. Pizza Hut also opened 297 gross new stores in the third quarter. Revenue from Taco Bell came to $534 million, which was an increase of 6% from the comparable quarter last year, but the operating margin declined 260 basis points because of higher general and administrative expenses. Taco Bell opened 74 gross new restaurants in the quarter. The Habit Burger Grills, which was acquired in March 2020, reported revenue of $132 million in the third quarter, and the restaurant chain opened eight gross new restaurants in the United States.
Strategic decisions to drive growth
As the restaurant sector starts to adapt to customers' digital needs, Yum Brands also has made some noteworthy changes to transform its processes by deploying technologically advanced solutions to enhance the guest experience.
After the company acquired Dragontail Systems, which offers AI-based integrated kitchen order management and delivery technologies, the company has been able to achieve positive results in delivery services by streamlining the end-to-end food preparation process.
At KFC U.S., the company launched its internally-built KFC e-commerce website and app in early 2021 and has begun the national roll-out of its platform. Pizza Hut U.S. launched a menu management system in the fourth quarter of 2020, where there is one integrated source for menu customization and pricing that can be synced across multiple digital channels. Yum Brands has initiated testing a new customizable tablet-based application for Taco Bell U.S. as well.
The company has introduced a de-risking strategy by reducing its ownership of restaurants with a franchising model. The spin-off of Yum China under this model has enabled the company to become a more asset-light company, which would work in favor of profitability in the long run by boosting return on equity.
The company is focused on menu innovation to drive revenue growth. Last August, Taco Bell relaunched its breakfast and fried chicken category with the Crispy Chicken Sandwich Taco. Habit added Crispy Chicken Sandwich and Chicken Bites to its menu and KFC continues to focus on menu innovation through re-bundling, repackaging and re-conceptualizing core menu items. Based on the initial success of this project, it would be safe to assume that Yum Brands is headed in the right direction to expand its share of key markets in the coming years.
The company is focused on revamping its financial profile while improving the efficiency of the organization and cost structure globally. In the first nine months of 2021, the company opened 1,798 gross new restaurants, and in the previous year, the company opened 2,423 gross new restaurants even amid a global pandemic. The management of the company is laser-focused on expanding the global reach by strategically opening new stores in regions that are expected to see robust economic growth.
The company has guided for systemwide sales growth of 7% to 8% through international expansions to locations where cheap labor and less saturated markets are available.
Takeaway
Yum Brands is moving in the right direction by focusing on expanding its business while keeping a close eye on operating costs. After initially getting hammered by the Covid-19 recession, the company has once again returned to a growth phase, and carefully planned investments in new business opportunities and digital solutions are likely to help the company report stellar earnings growth in 2022 as well.
This article first appeared on GuruFocus.
