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Restaurant stocks are a weird and wild place to invest money. Many times, a great new chain will appear and its stock will just go crazy as investors pile in to the new concept. We’ve seen this many times with companies like Chipotle Mexican Grill (NYSE: CMG), Shake Shack (NASDAQ: SHAK) and Buffalo Wild Wings (NASDAQ: BWLD).
Inevitably, however, the roaring growth these companies see in a rapid expansion phase – EPS that often climbs 30% or more year-over-year – wanes and the stocks fall back to earth.
Yum Brands (NYSE: YUM) is a different beast. It consists of several legacy chains that have effectively reached domestic maturity, yet continue to expand modestly overseas. It consists of the KFC, Taco Bell, and Pizza Hut brands, and exists over 125 countries with 41,000 restaurants.
Reflecting the Economy
Unlike its fast-growing competitors, Yum actually offers a lot of detail about the nature of the economy as a whole. KFC and Taco Bell are essentially fast-food brands, and Pizza Hut operates in a competitive sector that takes in a lot of revenue from low- to middle-income visitors.
When we see things like a decline in the fast-casual sector, as we are seeing with Chipotle and Buffalo Wild Wings, we would expect that the fast-food class below it such as Yum Brands might actually pick up in business if people want to spend less money. That’s essentially the case recently. Buffalo Wild Wings is seeing a drop-off, but Yum seems to be doing all right.
For the fourth quarter, Yum Brands worldwide sales grew 6%, while margins also increased to 13.6%. That pushed operating profit up a fantastic 17%. This came on the heels of continued expansion –374 new KFCs, 270 new Pizza Huts and 109 new Taco Bells.
Some restaurants are struggling in China, but not Yum Brands operations. China sales were up 7%, thanks to a modest 2% gain in same-store sales. Operating profit went through the roof, up 207%.
Breaking down by divisions, KFC sales increased 6%, driven by 3% same-store sales. Operating profit increased an impressive 7%. Pizza Hut sales increased only 2%, and 1% up in same-store sales. Still, operating profit increased 6% thanks to cost cuts. Taco Bell sales increased 7%, and a very strong 4% in same-store sales. Alas, costs are still struggling here, so operating profit decreased 7%.
Yum Brands Earnings: Modest Fourth Quarter
What we see in Yum Brands’ fourth quarter is modest improvement in most areas compared to the full-year results. For context, here’s the full-year data.
Yum Brands worldwide sales grew 5%. Margins went up to 16.0% and operating profit increased 7%. So the fourth quarter contributed pretty strongly to the operating profit.
Yum Brands’ China business did better in the fourth quarter, and that lifted that geographical division to a 2% full-year increase. Same-store sales in the fourth quarter also mitigated an otherwise dismal 4% same-store sales decline. Operating profit increased 8% for the year.
KFC for the full year mirrored the fourth quarter, suggesting that Colonel Sanders has his division under control and operating with a fair amount of stability. Pizza Hut also mirrored its fourth-quarter metrics. Taco Bell is the outlier, in that full year sales increased 8%, driven by 5% same-store sales growth. Operating margin leapt to 27.1%, and operating profit increased 12%.
Obviously, then, what we’re seeing is Taco Bell leading the charge in many ways while the others hold down the fort.
Overall, Yum Brands revenues kind of flopped around, the increase in net income really came from cost cuts. So while net income lifted for the year from $1.05 billion to $1.3 billion, don’t get too excited.
Basically, you aren’t paying for much organic growth. You’re paying 24 times earnings for a 2.52% yield. I think that’s too much, so I would not buy here.
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