Yum! Brands (YUM) Uses Robust Taco Bell Amid High Debt

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Yum! Trademarks, Inc. YUM benefits from Taco Bell’s robust performance, menu innovation and strong digitalization. The company has also focused on expanding its units, which should drive growth. As a result, the company’s shares gained 11.3%, compared to industry growth of 10.8%.

Additionally, the consensus mark for 2021 earnings has seen upward revisions to estimates, reflecting analyst optimism about the company’s growth potential. Over the past 30 days, Zacks’ consensus estimate for its 2021 earnings has moved north 0.3% to $ 3.89 per share. However, Pizza Hut’s poor performance and high indebtedness remain a concern.

Key enablers

Taco Bell impressed investors with strong fourth quarter 2020 results. Company rosters increased 1% in the reported quarter compared to 2% growth in the previous year quarter. Its operating margin increased 10 basis points year-on-year to 33.8%. This was primarily attributable to lower general and administrative expenses, higher comparable store sales and higher corporate restaurant margins during the current quarter. Taco Bell recorded 93 gross openings of new restaurants during the quarter under review. In addition, the company continues to reopen its temporarily closed restaurants.

During the fourth quarter, the segment not only expanded into new market places, but also strengthened its media presence with the launch of its loyalty program. This, along with its product offerings, boosted sales in the quarter, resulting in a single-digit sales mix. Notably, the segment’s digital sales mix contributed 12% of total sales for the quarter under review. It also generated over $ 1 billion in sales for 2020.

Plus, Yum! Brands’ partnership with online food delivery platform Grubhub will improve online sales and delivery from its restaurants. Additionally, the company has implemented various digital features across mobile and online platforms across all brand segments to enhance the customer experience. The company has also made efforts to speed up its delivery services and the results have been positive so far. At the end of the fourth quarter of 2020, the company had more than 35,000 restaurants offering delivery worldwide, up 16% year on year. In 2020, digital sales amounted to $ 17 billion, which suggests a 45% increase from the previous year. During the quarter, Pizza Hut US achieved 18% same-store sales growth in the off-premises channel. In addition, in the Pizza Hut International segment, off-premises sales generated 9% same-store sales growth in the fourth quarter of 2020.

Concerns

Despite effective innovation in products, marketing and promotions, Pizza Hut’s sales trend was choppy in the last quarter. In the first, second, third and fourth quarters of 2020, Pizza Hut comparable store sales decreased by 11%, 9%, 3% and 1% respectively. Although MIAM! Brands is focused on transforming its Pizza Hut business into a modern delivery asset base in the United States, there were 1,745 Pizza Hut restaurant closures in 2020 due to COVID-related disruptions. The company believes that the trend of volatile sales is likely to persist.

A strong balance sheet will help the company overcome the current crisis. At the end of December 31, 2020, the company’s long-term finance debt stood at $ 10.2 billion, up from $ 10.6 billion as of September 30, 2020. However, the company ended the fourth quarter of 2020 with $ 730 million in cash and cash equivalents, which may not be enough to handle the high level of debt.

Zacks ranks

Yum! Brands – share space with McDonald’s Company MCD, Starbucks Company SBUX and Red Robin Gourmet Burgers, Inc. RRGB in Zacks Retail – Restaurants – currently carries a Zacks Rank 3 (pending). You can see tThe full list of today’s Zacks # 1 Rank (Strong Buy) stocks here.

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