The withdrawal of COVID restrictions has come as a much-needed relief for the business world but certain areas of the economy are yet to fully benefit from it, and the restaurant industry is one of them. The story of Yum! Brands, Inc. (NYSE: YUM) was no different in the early days of the pandemic — with sales plunging amid widespread store closures. A year later, the fast-food chain that owns popular brands like Pizza Hut and KFC is almost back on track, thanks to its efforts to adapt to the new normal.
Investing in YUM
Over the past several months, the company’s market value expanded consistently, after slipping to a multi-year low early last year, though the stock experienced high volatility in recent weeks. Considering the reasonable valuation in relation to earnings, despite the recent rally, it is worth keeping the stock on the watch-list. While being bullish on the long-term growth prospects of the stock, market watchers are cautious about the underlying challenges facing the industry in the wake of the pandemic.
After the disappointing show in the initial months of the pandemic, when the movement restrictions came into force, Yum!’s financial performance improved significantly later and earnings topped expectations in all the trailing five quarters. In the first three months of fiscal 2021, adjusted profit surged to $1.07 per share aided by an 18% increase in revenues, which also beat the Street view. Same-store sales were up 9%.
Resilient to Crisis
In a sign that the vaccine-driven market reopening is having a positive effect on the hotel industry, Yum! opened as many as 435 new stores globally in the first quarter. It also hired thousands of new employees to meet the high demand for home delivery, outperforming rivals by wide margins in terms of sales. Underscoring its ability to bounce back from adversity, the company recently resumed share buyback, a year after suspending the program.
After registering record growth in online sales last quarter, the management’s growth strategy is currently focused on the continued expansion of digital and marketing capabilities through various initiatives, with the latest move being the acquisition of tech start-ups Tictuk and Kvantum.
Our expectation for all of our brands is to be growing units and that’s been our history and will continue to be our expectation going forward. KFC, we think has historically been strong and we want it to continue to be strong, but we have high expectations for Taco Bell, Pizza Hut, and the Habit. Common across all of them is we think strong franchisees, very strong unit economics that improves as the business rebounds from COVID, continued brand love from consumers, and the ability to serve them on an off-premise basis.David Gibbs, CEO of Yum! Brands
Yum!’s iconic brands and robust franchise network helped it withstand the economic slowdown to a large extent, but the crisis is far from over and customer traffic remains poor in many international locations. The continuing uncertainty, especially in markets severely affected by the pandemic, poses short-term risks to the stock that is likely to experience volatility in the near future. Also, Yum! needs to maintain an effective strategy – in terms of marketing and promotional activities — to deal with competition, especially from arch-rival McDonald’s (NYSE: MCD).
In the past twelve months, YUM gained about 30% and mostly stayed above the $100-mark. It looks poised to bounce back to the May peak before year-end. The shares traded slightly lower during the early hours of Tuesday’s regular session but stayed well above their 52-week average.
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