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Yum Brands Inc YUM

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Dining Room Reopenings Generate Mouth-Watering Comps for Yum, but Share Price Not Appealing

Sean Dunlop Equity Analyst

Analyst Note

| Sean Dunlop |

Dining room reopenings propelled wide-moat Yum Brands to impressive 23% global comparable-store sales growth, with international comps for KFC and Pizza Hut (which generate more than half of their sales abroad, where COVID-19 protocols were more stringent) 25 points and 12 points higher than domestic results, respectively. Consistent with what we’ve seen across our restaurant coverage, easing restrictions released a cascade of pent-up demand, with returning volume pushing all three of Yum’s core brands to comparable-store sales growth relative to 2019 levels (2.7% at KFC, 0.1% at Pizza Hut, and 11.3% at Taco Bell, by our calculations). Improving store-level economics across markets generated strong growth, with the system adding 603 net new units as unit growth reached 2% over the last 12 months (up 160 basis points sequentially). While recent results certainly impressed, our longer-term forecasts are largely intact, though we anticipate a modest midterm increase in unit growth consistent with management’s recently elevated guidance (to 4%-5% annual unit growth, from 4% previously), which appears plausible given KFC’s recent strength and Taco Bell’s growing traction abroad. After marking up our unit growth forecast and layering in a mid-single-digit headwind from Morningstar’s increased U.S. statutory tax rate forecast, we expect a mid-single-digit hike to our $112 fair value estimate, leaving the shares looking expensive at current market prices.

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Company Profile

Business Description

Yum Brands is a U.S.-based restaurant operator featuring a portfolio of four brands: KFC (25,300 global units), Pizza Hut (17,700 units), Taco Bell (7,500 units), and The Habit Burger (290 units). With $50 billion in 2020 systemwide sales, the firm is the second- largest restaurant company in the world, behind McDonald's ($90 billion) but ahead of Restaurant Brands International ($31 billion) and Starbucks ($19 billion). Yum is 98% franchised, with the largest franchisee, Yum China, created via a 2016 spin-off transaction (after which Yum China agreed to pay 3% royalties to Yum Brands in perpetuity). Yum is the newest evolution of Tricon Brands, formerly a division of PepsiCo, and generates the bulk of its revenue from franchise royalties and marketing contributions.

1441 Gardiner Lane
Louisville, KY, 40213
T +1 502 874-8300
Sector Consumer Cyclical
Industry Restaurants
Most Recent Earnings Mar 31, 2021
Fiscal Year End Dec 31, 2019
Stock Type Cyclical
Employees 38,000


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