YUM Brands Inc. (YUM)

Appearing at a competitor conference this past September 20th, Yum Brands CFO Chris Turner made some remarks about potential acquisitions: “We’re keeping our eyes open. To do something that’s a bet-of-the-company size, that would be a really, really high bar before we decide to do something like that. But, I think you could imagine us being really interested in a smaller brand like Habit [which Yum acquired in March 2020], and saying, how can we unlock growth? Of course, we’re always scanning categories. There’s lots of – we’re probably not going to do something that is directly competitive with our current categories or franchisees – but [there’s] a lot of interesting categories outside of that. We’re always looking at different spaces. The Mediterranean food space is interesting. There’s lots of interesting categories out there that we’re studying.”

Yum Brands’ quick-service Mexican concept Taco Bell acknowledges that the official return date for its Mexican Pizza will be Thursday, September 15th (with loyalty program members getting early access on September 13th). Mexican Pizza was a permanent menu item from its inception in 1985 (when it was known as “Pizzazz Pizza”) until its discontinuation in November 2020. This discontinuation caused a social-media uproar, when eventually led to Mexican Pizza being reintroduced in mid-May 2022.

Earlier today (Wednesday), Yum Brands reported adjusted Q2 EPS of $1.05, falling short of our $1.13 estimate and sell-side consensus (according to Consensus Metrix) of $1.10. We attribute the shortfall primarily to: (1) weaker-than-expected same-store sales at KFC and Pizza Hut (including both brands in China and the U.S.), and (2) a Q2 adjusted tax rate of 24.3% (as compared to our 21.6% estimate and consensus at 21.7%. The tax-rate difference cost Yum Brands about -4 cents in Q2 EPS, implying that Q2 EPS would have been only one cent short of consensus excluding this factor.

Taco Bell’s Mexican Pizza was on its menu from 1985-2020, and then unceremoniously dumped. It was officially brought back nationwide this past May 19th — 12 days ago — with early access provided to Taco Bell app users starting two days before that. It appears that Mexican Pizza has sold quite briskly over the last 12-14 days, with many Taco Bells already selling out of the menu item. 

KFC Europe looks like it is in the beginning stages of rolling out multiple plant-based “chicken” menu items to thousands of its restaurants there. The rollout appears to include chicken sandwiches, chicken tenders, chicken buckets, and chicken wraps (Twisters).

Earlier today, Yum Brands reported adjusted Q1 EPS of $1.05. This was two cents above our $1.03 forecast, but two cents below sell-side consensus (according to Consensus Metrix) of $1.07.

Earlier today, master franchisee Yum China (YUMC; Not Rated) provided a business update in which it said that while its same-store sales were down by about -4% over January/February, they had “decreased approximately -20% year-over-year for the first two weeks of March” and were “still trending down in recent days.”

Earlier today, Yum Brands reported adjusted Q4 EPS of $1.02, falling short of our $1.15 forecast and sell-side consensus (according to Consensus Metrix) of $1.09.

Earlier today, Yum Brands reported adjusted Q3 EPS of $1.22, ahead of our $1.10 forecast and sell-side consensus (according to Consensus Metrix) of $1.09. However, we calculate that: (1) pre-tax investment income of $52 million (“related to the change in fair value of our approximate 5% investment in Devyani International Limited, an entity that operates KFC and Pizza Hut franchised units in India that executed an initial public offering during the quarter”) added about +16 cents’ worth of EPS help, and (2) by our calculations, the Q3 adjusted tax rate of 18.9% added about +4 cents of EPS help (relative to our 21.5% forecast and consensus of 21.4%).

Earlier today, Yum Brands reported adjusted Q2 EPS of $1.16, surpassing our $0.97 forecast and sell-side consensus (according to Consensus Metrix) of $0.96. We attribute the EPS beat primarily to: (1) better-than-expected same-store sales at Taco Bell and KFC U.S., (2) leverage achieved due to sales strength, and (3) a better-than-anticipated adjusted tax rate of 20.0% (versus our 21.5% projection and consensus of 21.5%).

With this report, we boost our Q2E same-store sales forecasts as follows: (1) for Taco Bell, up by +2 percentage points to +17% (according to Consensus Metrix, sell-side consensus is at +15.7%, although be aware that Yum Brands does not report its same-store sales out past the decimal point), and (2) for KFC U.S., up by +1 percentage point to +3% (consensus is at +2.5%).

Earlier today, Yum Brands hosted a virtual Analyst Meeting, focused on its KFC business. Management says that in terms of worldwide units, KFC is only about a third of the way to its potential; “we’ll be growing the brand for years.” As of the end of 2020, KFC had 25,000 units, so this statement implies a (very) long-term goal of roughly 75,000 KFC restaurants worldwide.

Earlier today, Yum Brands reported Q1 EPS of $1.07. This was above our $0.89 forecast and sell-side consensus (according to Consensus Metrix) of $0.87.

Yum Brands plans to release its Q1 2021 earnings before the market open on Wednesday, April 28th. How do YUM shares tend to trade heading into earnings, and the day of (for a before-the-market-open) or after (for an after-the-market-close) an earnings release?

With this report, we boost our Q1E same-store sales forecasts as follows: (1) for Taco Bell, up by +1 percentage point to +7% (according to Consensus Metrix, sell-side consensus is at +5.7%, although be aware that Yum Brands does not report its samestore sales out past the decimal point), and (2) for KFC U.S., up by +1 percentage point to +13% (consensus is at +11.6%).

On January 6, 2020, Yum Brands announced its plan to acquire The Habit Burger Grill, which as of full-year 2019 was the 17th-largest burger concept in the U.S. (in terms of domestic systemwide sales, at $450+ million), and in the top 100 overall. The Habit Burger Grill is meaningfully smaller than Yum’s core brands of KFC, Taco Bell, and Pizza Hut. As such, the acquisition of Habit (which closed on March 18, 2020) suggests that: (1) Yum Brands may be generally acquisitive in the future (incidentally, in keeping with current general industry trends), and (2) it isn’t hesitant to make an acquisition that it believes will create shareholder value in the long term, even if the size of that acquisition isn’t all that large relative to its core brands today.

Earlier today, Yum Brands reported Q4 2020 adjusted EPS of $1.15, above our $1.01 forecast and sell-side consensus (according to Consensus Metrix) of $1.01. We calculate that the Q4 adjusted tax rate was approximately 8.5%, much more favorable than our 21.0% estimate and consensus of 20.8%. We further calculate that relative to our tax-rate projection, the actual adjusted Q4 tax rate added about +15 cents to Q4 adjusted EPS. Excluding this factor, Q4 adjusted EPS would have been closer to $1.00.

With this report, we update our data-driven Kalinowski Quick-Service Other Index for Q4E to +2.3%. This figure is based on our latest proprietary checks/data as regards same-store sales performance for this segment during October, November, and December. We believe that October same-store sales were likely the best month of the quarter, while November was likely the worst month of the quarter. (As a reminder, we define “quick-service other” as all quick-service, excluding burger, pizza, and sandwich concepts.)

With this report, we update our data-driven Kalinowski Quick-Service Pizza Index for Q4E to +12.1%. This figure is based on our latest proprietary checks/data as regards same-store sales performance for this segment during October, November, and December. We believe that December same-store sales were likely the best month of the quarter, while October was helped by arguably the busiest Halloween ever for pizza delivery/carryout.

Earlier today, Yum Brands reported adjusted Q3 EPS of $1.01, ahead of our $0.83 forecast and sell-side consensus (according to Consensus Metrix) of $0.81. Third-quarter company-owned restaurant margins came to 17.9%, better than our 17.3% estimate and consensus of 16.1%. Taco Bell in particular generated very good restaurant-level margins (27.5% in Q3), although on today’s conference call management commented that over time margins should become more normalized as larger orders may become less of the overall sales mix.

With this report, we update our data-driven Kalinowski Quick-Service Other Index for Q3E to +4.3%. As a reminder, we define “quick-service other” as all quick-service concepts excluding the pizza, burger, and sandwich categories.

With this report, we update our data-driven Kalinowski Quick-Service Pizza Index for Q3E to +13.6%. This figure is based on our latest proprietary checks/data as regards same-store sales performance for this segment during July, August, and September.

With this report, we introduce our quarterly EPS estimates for Yum Brands (YUM; Neutral, $96.15) for 2021E as follows:
Q1E: $0.84
Q2E: $0.90
Q3E: $1.00
Q4E: $1.16

Earlier today, Yum Brands (YUM; Neutral, $91.46) reported that its adjusted Q2 EPS came to $0.82, well ahead of our $0.55 forecast and sell-side consensus (according to Consensus Metrix) of $0.57. The $0.82 figure included a +21 cent benefit related to Yum’s investment in Grubhub (GRUB; Not Rated). Adjusted EPS would have been about $0.61 excluding the mark-to-market for this investment.

Earlier today, Yum Brands (YUM; Neutral, $94.25) filed an 8-K which included a business update. As a result, we raise our Q2E EPS estimate by +5 cents, to $0.55. Our full-year 2020E EPS forecast goes up by +10 cents, to $3.00. And, given this higher anticipated base of earnings coming off of this year, we raise our 2021E EPS projection by +5 cents, to $3.80.

Yum Brands (YUM; Neutral, $88.27) reported adjusted Q1 EPS of $0.64 — ahead of our $0.50 forecast, and a little short of sell-side consensus (according to Consensus Metrix) of $0.66. Yum notes that its investment in Grubhub (GRUB; Not Rated) cost it -6 cents of EPS in Q1.

With this report, we change our rating on Yum Brands (YUM; $85.61) to Neutral (from Buy). This change largely reflects the following factors: (1) currencies that may work against Yum’s earnings over the remainder of 2020, (2) other costs that may creep up in Q2, (3) the possibility of store closures hurting Q2 by more than the Street anticipates, (4) possible same-store sales issues at Taco Bell, and (5) YUM shares’ +55% rise off of its 52-week low, which has allowed it to come within less than 50 cents of our $86 target price (which we now move to “NA” with this report. We note the following:

We lower our worldwide aggregate same-store sales estimates for Yum Brands (YUM; Buy) as follows:
Q1E 2020: down by -8 percentage points to -8%
Q2E 2020: down by -23 percentage points to -23%
Q3E 2020: down by -15 percentage points to -13%
Q4E 2020: down by -7 percentage points to -5%
Full-year 2020E: down by -14 percentage points to -13%
Full-year 2021E: up by +5 percentage points to +7%

Earlier today, Yum Brands (YUM; Buy) reported adjusted Q4 EPS of $1.00 — which included a -$0.05 hit related to the mark-to-market adjustment for Yum’s investment in Grubhub (GRUB; Not Rated). Excluding this GRUB-related adjustment, adjusted EPS would have been $1.05 — still short of our $1.14 forecast and $1.13 sell-side consensus (according to Consensus Metrix).

Earlier today, Yum Brands (YUM; Buy) reported adjusted Q3 EPS of $0.80 — which included a -$0.15 hit related to the mark-to-market adjustment for Yum’s investment in Grubhub (GRUB; Not Rated). Excluding this GRUB-related adjustment, EPS would have been $0.95, matching our $0.95 forecast, although a penny shy of the sell-side consensus (according to Consensus Metrix) of 0.96.

We maintain our Buy rating on YUM and note the following:

Earlier today, Yum Brands (YUM; Buy) reported Q2 adjusted EPS of $0.93, topping our $0.89 forecast and sell-side consensus of $0.87. Yum’s updating of its fair value of its investment in Grubhub (GRUB; Not Rated) added $0.06 to Q2 EPS, but we’d also note that the Q2 adjusted tax rate of 23.7% hampered EPS by $0.03 according to our math relative to our 20.6% projection (and consensus of 20.6%). Second-quarter restaurant-level margins for company-owned stores matched our forecast.

Ahead of Yum Brands’ (YUM; Buy) second-quarter earnings release scheduled for before the market open on Thursday, August 1st, we raise our Q2 EPS estimate by $0.01 to $0.89, placing us two cents above sell-side consensus according to Consensus Metrix. Our EPS estimate increase is driven by (1) an update to our Q2E Taco Bell same-store sales projection to +5% (which places us as tied for the high on the sell-side in this respect), from our prior +4%, and versus consensus of +3.7% (please keep in mind that Yum Brands does not report its same-store sales out past the decimal point), and (2) taking up our worldwide Q2E KFC same-store sales estimate to +4% (from +3%).

Not too long ago, the Taco Bell concept owned by Yum Brands (YUM; Buy) filed its 500+ page Franchise Disclosure Document (FDD) for 2019. In this report, we cite some of the highlights from that document following our review of it, including our review of it in comparison to last year’s Franchise Disclosure Document. For example, based on data provided, our best guess is that during 2018 U.S. companyowned traditional Taco Bells generated average sales of $1,810,474 and median sales of $1,578,925. And, our best guess is that during 2018, U.S. (single-brand) franchised traditional Taco Bells generated average sales of $1,572,481 and median sales of $1,513,671. We maintain our Buy rating on YUM and note the following:

With third-party delivery aggregators continuing to grow, providing additional convenience to the consumer, we decided to look at various quarterly data provided by Grubhub (GRUB; Not Rated), correlating these data sets with various sectors’ same-store sales (for U.S. chain restaurants). To do this, we used six different Kalinowski Restaurant Industry Index sector indices, which are sorted by brand type and based on the weighted-average components from 48 different publiclytraded restaurant concepts. (The weightings are based on each concept’s 2018 U.S. systemwide sales, as measured by Technomic.)

In April, Restaurant Business reported that “Yum [Brands], the parent company of Taco Bell, KFC and Pizza Hut, will ‘absolutely’ acquire another brand one day, [CEO Greg] Creed said. ‘In the future, other brands will want to become part of the Yum family,’ he said. ‘We’ll do it because these brands want to join us more than I want to pay some huge multiple.’”

With this report, we increase our data-driven Kalinowski Quick-Service Other Index for Q2E by +30 basis points, to +2.6%. This figure is based on our latest proprietary checks/data as regards same-store sales performance for this segment during April 2019 and the beginning of May 2019.

With this report, we update our data-driven Kalinowski Quick-Service Pizza Index for Q2E by +40 basis points, to +1.7%. This figure is based on our latest proprietary checks/data as regards same-store sales performance for this segment during April 2019 and the beginning of May 2019.

In our April 8th report “Tidbits re: Burger-Sector Same-Store Sales Trends, and SBUX,” we noted that “With March 2019 now in the rear-view mirror, we are pleasantly surprised that this month appears to have turned out very well for burger-sector same-store sales. In fact, based on our proprietary, data-driven checks, the midsingle digit number put up by U.S. quick-service burger chains for March 2019 looks like the best month in this regard since February 2016, for which some concepts (depending on their accounting methodologies) were helped by that month’s extra Leap Day.”

Earlier today, Yum Brands (YUM; Buy) reported Q1 adjusted EPS of $0.82, surpassing our $0.72 forecast (which had incorporated an anticipated -$0.09 hit from markto-market of Yum’s investment in GrubHub [GRUB; Not Rated]) and the $0.81 consensus number (likely not apples-to-apples with our forecast). Yum notes that “We reflected the change in fair value of our investment in Grubhub by recording $20 million of pre-tax investment expense, resulting in a negative ($0.05) impact in EPS.”

Ahead of Yum Brands’ (YUM; Buy) first-quarter earnings release — scheduled for before the market open on Wednesday, May 1st — we look at a key positive and a key risk surrounding YUM. Most importantly on the positive side of the ledger, based on our data-driven checks, we raise our Q1 same-store sales forecast for Taco Bell by one percentage point, to +5%, as we believe that brand’s momentum, innovation, and differentiation continue to pay off. Promotions during various parts of the first quarter included Steak Rattlesnake Fries, the Steak Rattlesnake Burrito, the return of the Naked Chicken Chalupa, and the return of Nacho Fries. Our Q2E same-store sales forecast is also boosted by one percentage point, to +4%, and that is not a bestcase scenario if the second quarter trends well. We’ll see…

We briefly note the following tidbits regarding pizza-sector market-share trends in the U.S., McDonald’s (MCD; Buy), and privately-held Luckin Coffee:

We briefly note the following tidbits regarding McDonald’s (MCD; Buy), Domino’s (DPZ; Buy), and KFC (owned by Yum Brands [YUM; Buy]):

We briefly note the following tidbits regarding Domino’s (DPZ; Buy), Taco Bell (owned by Yum Brands [YUM; Buy]), and Pizzeria Locale (owned by Chipotle Mexican Grill [CMG; Not Rated]):

We briefly note the following tidbits regarding KFC (owned by Yum Brands [YUM; Buy]), Dunkin’ (owned by Dunkin’ Brands Group [DNKN; Neutral]), and Domino’s (DPZ; Buy):

We briefly note the following tidbits regarding the market for coffeeshops in China, and the Kalinowski Restaurant Industry Index:

With this report, we introduce our data-driven Kalinowski Quick-Service Other Index for Q1E at +1.9%. This figure is based on our latest proprietary checks/data as regards same-store sales performance for this segment during January 2019 and most of February 2019.

With this report, we introduce our data-driven Kalinowski Quick-Service Pizza Index for Q1E at -0.1%. This figure is based on our latest proprietary checks/data as regards same-store sales performance for this segment during January 2019 and most of February 2019.

We briefly note the following tidbits regarding Wendy’s (WEN; Neutral), Taco Bell (owned by Yum Brands [YUM; Buy]), and privately-held Chick-fil-A:

We briefly note the following tidbits regarding McDonald’s (MCD; Buy) and Taco Bell (owned by Yum Brands [YUM; Buy]):