Yum Brands (NYSE: YUM) reports earnings on June 29. No matter what numbers the company may post, it looks like it’s going to be a rough summer for the parent company of several well-known fast-food chains.
Analysts are expecting Yum Brands to post earnings per share of 50 cents on revenue of $1.15 billion. The whisper number is saying Yum will surprise to the upside at 54 cents EPS. Both numbers would be lower on both a sequential and year-over-year (YoY) basis.
But in what is becoming a broken record, analysts are going to be more interested in the company’s guidance. Did the company improve the 7% decline in comparable-store sales from the first quarter? And is the company seeing better results now that dine-in options are available at some locations.
A large franchisee has declared bankruptcy
The immediate problem is that one of its leading franchisees, NPC International is expected to declare bankruptcy. NPC is the largest Pizza Hut and Wendy’s (NASDAQ: WEN) franchisee with 1,200 and 400 restaurants respectively.
The immediate concern seems to be Pizza Hut. Yum! Brands was already alerting analysts and investors to what it regarded as “choppiness” in the Pizza Hut segment this year. However, it was generally accepted that YUM might benefit from the Covid-19 pandemic. And in early June, YUM stock climbed approximately 70%.
But since then, the stock has stopped rallying. And the expectation is that there may be more struggles ahead.
The lack of dine-in eating is taking its toll
Just this week, McDonald’s (NYSE: MCD) reported disappointing earnings. The company also announced it may close up to 200 restaurants. Part of the reason for McDonald’s struggles is a similar problem for Yum. Dine-in service is still limited, and in some states it is still not allowed. Yum Brands is the parent company for such brands as KFC, Taco Bell, The Habit Burger Grill, and WingStreet. All of these brands rely on dine-in service.
And although the company has made investments in new service and technology solutions, it still needs to have its restaurants open. Unlike fast-casual chains such as Chipotle Mexican Grill (NYSE: CMG), the restaurants in Yum’s portfolio are not necessarily the first names that come to mind when hungry customers get their DoorDash or GrubHub (NYSE: GRUB) deliveries.
Lost in a sea of take-out options
Throughout this pandemic, millions of Americans have been doing their part by staying home. But at the same time, customers were mindful of the plight of many restaurants. The problem for a company like Yum Brands is that many Americans decided that they would rather order from local “mom and pop” restaurants rather than the large chains. I know that for me, it wasn’t about the quality of the food. In fact, Pizza Hut got a fair share of my business. But I was mindful of the small businesses that were in danger of not re-opening.
And Yum also lost the benefit of being an easy lunch option for working Americans.
Will the future be more of the same?
The reality of the novel coronavirus is that regardless of how you feel about it, it’s not going away soon. We may (emphasis on may) be learning how to live with it better, but it will be a part of our national conversation even after a vaccine is available.
And that’s why I disagree with the analysts who have arrived at a consensus 12-month price target of $101.90 for the stock. Sure, it would seem that this quarter will mark the bottom. But that doesn’t mean the company is close to whatever a new normal is supposed to be.
YUM stock had a meteoric run in 2019, but it looks like the stock got a bit over its skis at a price near $120. Here’s another way to think about. The company’s revenue in each of the last two years was approximately $5.6 billion. In 2016, revenue was just under $11 million.
In 2016, YUM stock was trading in the $60 dollar range. In 2019, it was trading in the $90 range. Yes, the stock had many catalysts going for it from 2017 through 2019. But in the midst of those catalysts, the company’s revenue was going down. That tells me the stock might have been fairly valued after the March selloff. And why I think Yum Brands may leave a bad taste in investors’ mouths.
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Restaurant Stocks That Still Look Tasty As the Economy Reopens
As part of our national response to the Covid-19 pandemic, many Americans considered it their patriotic, if not moral, duty to support the restaurant industry. And while many consumers were intensely focused on their small, local restaurants, the national chains were still open for business during this time.
And the reality is that the national chains are going to be the most adaptable to whatever pace of economic recovery we see. Hopes for a “V” shaped recovery have pretty much gone out the window. The new model suggests a stair-step recovery may be the best-case scenario.
The worst case scenario for the restaurant industry will be one where different regions of the country are subject to rolling lockdowns. In a business with notoriously low margins, an open/close, open/close recovery would be disastrous.
It’s one reason why I’m not sure I would be diving into restaurant stocks right now. But the same was being said of airline stocks and cruise line stocks. And sure enough, discount investors have been trying to invest in these stocks.
But as all 50 states have now re-opened in some fashion, it’s not unlikely that restaurant stocks are drawing attention from investors. We’ve put together this presentation that highlights seven restaurant stocks that you should consider looking at if you want to dive into this sector.
View the "Restaurant Stocks That Still Look Tasty As the Economy Reopens".