Stock Analysis & Ideas

Will Yum! Brands Prosper, Considering an Uptick in Website Hits?

Story Highlights

Despite macroeconomic headwinds, the global restaurant industry is poised for exponential growth given the opening of economies and surging demand for travel, food, and leisure activities. However, will Yum! Brands make hay while the sun shines?

Yum! Brands (NYSE: YUM) has witnessed its stock lose 10.9% year-to-date, amid the broader market sell-off. However, after its first quarter results, which were quite off the mark, the franchisor has seen its stock rise 9.5% to date. Yum owns and operates the franchisees of Pizza Hut, KFC, Taco Bell, and Habit Burger Grill.

YUM in the Current Scenario

Due to geopolitical concerns, YUM decided to halt all operations in the invading nation and sold Pizza Hut’s Russian franchise to local operator Noi-M for $4.92 million. Moreover, the COVID-19-related lockdown in China has also affected YUM’s performance as China is the second largest market for YUM.

Not to mention, record high inflation, which is adding a burden to restaurants’ input costs; skyrocketing fuel prices; and labor shortages are also dragging down the company’s performance. Although YUM is not involved in the day-to-day operations of its franchises and takes a 3% to 6% cut as royalty fees from their sales, the ongoing macroeconomic factors have undoubtedly dampened the performance of the company as a whole.

In Q1FY22, YUM missed adjusted earnings estimates and its revenue fell short of the consensus estimate. However, its worldwide system sales (excluding foreign exchange) grew 8% year-over-year, with KFC contributing 9%, Taco Bell adding 8%, and Pizza Hut generating 3%.

Notably, out of the three franchises, Pizza Hut’s performance dropped off the most in the past couple of years due to strong competition and poor management, leading to shrinking margins. Nonetheless, the robust performance of the other two franchises comfortably offsets the former’s weakness. Meanwhile, KFC contributed almost 50% towards system sales, followed by an almost equal contribution by Pizza Hut and Taco Bell, while Habit Burger was the smallest contributor.

Taco Bell Defy

Taco Bell is a Mexican-themed quick service restaurant. On the occasion of the brand’s 60th anniversary this year, it has launched the Taco Bell Defy concept to ensure a fun and seamless drive-thru experience for customers, with the aim of serving them within two minutes or less (lower than their prior service time of approximately 4.5 minutes).

The Taco Bell Defy is a two-story, four-lane restaurant concept with each lane catering to different segments of customers. The food is prepared on the second floor and delivered via vertical lifts to the customers.

One lane is for customers who pre-order through the Taco Bell app and do not wish to wait in queues. The second lane is for customers who order through third-party apps and will have hand-delivered items through drivers. Meanwhile, the other two are traditional drive-thru lanes for people who enjoy the experience of selecting their favorite menu items from the speakers or kiosks.

The first Taco Bell Defy store opened in Brooklyn Park, Minnesota on June 7, in partnership with franchisee owner Border Foods, and many such stores are expected to show up across the U.S. Additionally, Taco Bell is also expecting to permanently add Mexican pizzas to its menu by fall, in response to the solid demand it witnessed after re-introducing it some time back.

Wall Street’s Take

Amid the challenging macroeconomic scenario, analysts on the Street are cautiously optimistic about YUM stock with a Moderate Buy consensus rating based on seven Buys and nine Holds. The average Yum! Brands’ price forecast of $134.07 implies 11.3% upside potential to current levels.

Website Traffic Analysis

According to the TipRanks Website Traffic tool, the total estimated visits across all Yum! Brands’ franchises and devices is slowly gaining momentum in the current quarter. Although the company witnessed diminishing visits in the first quarter, the current quarter is showing an upward trend, which implies that the efforts taken by the company to bolster demand are working.

In May, YUM’s website traffic recorded a 23.58% sequential growth in monthly visits. Similarly, both quarter-to-date and year-to-date estimated visits have also grown by 15.75% and 47.16%, respectively, against the comparative periods last year.

Key Takeaways

Indeed, the current environment is posing considerable challenges to the restaurant industry. However, YUM’s constant efforts to mitigate these and introduce innovation and technology to appeal to the masses are witnessing increasing popularity. The TipRanks tool also indicates that YUM’s estimated global website visits are improving.

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