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Since being spun off from PepsiCo back in 1997, Yum! Brands (NYSE: YUM ) has been a tremendous investment, returning more than 1,000% in just over 16 years. Fast-casual competitor (which featured Coca-Cola as an early investor) Chipotle Mexican Grill (NYSE: CMG ) has returned more than 1,000% since going public as well. The difference? Chipotle has actually out-returned YUM! by about 20%, in essentially half the time. But let's be honest: Looking back is great if you were fortunate enough to buy early in either of these two great companies.
What really matters for investors today, though, is what the future will look like. The thing is, as amazingly well as Chipotle has performed since going public, in many ways it's just getting started. Let's take a closer look at how it's positioned going forward as compared to Yum!, and stumbling stalwart Darden Restaurants (NYSE: DRI ) , which has also been a tremendous investment since Yum!'s spinoff from Pepsico:
Big trouble in little China?
Yum! has been able to sustain much of its growth due to its mix of KFC, Taco Bell and Pizza Hut, which the company has been able to exploit in international markets to a large degree. Its KFC business has shown extraordinary growth -- at least it had until "chickengate" about a year ago, when a number of Chinese suppliers' chicken were found to contain high levels of hormones and antibiotics, leading to massive 11% same-store sales declines in the critical Chinese market.
How bad have things been for Yum! in China this year? The company revised its full-year outlook recently, and is expecting to see earnings-per-share decline for the full year, and by as much as the low double-digits. This after 11 consecutive years of growing earnings by at least 13%.
Will Food with Integrity take Chipotle where Yum! is trying to go?
While the international growth is just getting started for Chipotle, it is taking a page from the Yum! business and expanding into new cuisines. First with Shophouse, modeled on Southeast Asian street food and using the same sort of fresh, customer-picked ingredients to make each dish quick and tasty. A total of six locations have been opened, but the company isn't -- at least so far -- planning a rapid rollout of the concept. Management had this to say in a June press release : "The new ShopHouse deals do not signify an acceleration of Chipotle's development plans for the concept, and Chipotle's growth will be driven primarily by developing the Chipotle brand in the U.S. for the foreseeable future."
And now there's Pizzeria Locale, which the company has just gotten involved with, and you have potentially a third brand that the company (and investors) can look to for many more years of growth. This third concept, as with Shophouse, however, isn't going to ramp up to light-speed any time soon. Chipotle founder and co-CEO Steve Ells, from the company release: "While both Pizzeria Locale and ShopHouse are exciting concepts, it's important to remember that our growth will continue to be driven for the foreseeable future by expanding the Chipotle brand within the U.S."
Investors need to remember that both of these concepts are still in the development stage; but as long as new Chipotle locations are opening at a rate of three per week (129 YTD through September,) taking the time to perfect Shophouse and Pizzeria Locale makes sense. And with the company's focus on Food with Integrity, a debacle like the one that's killing Yum! in China isn't likely to derail Chipotle anytime soon. The results continue to amaze, with same-store sales in the latest quarter up 6%, and net income up over 15%.
Is Yum! becoming the next Darden? In a bad way?
Darden's legacy restaurants, especially Red Lobster, are killing the company's returns. Red Lobster's same-restaurant sales declined 4.5% last quarter, continuing a trend that's more than a year in length now. The oldest chain under the Darden umbrella, founded in 1968, is quickly losing relevance in a world with a million faster, cheaper, and just more enticing alternatives, and where seafood isn't a rare treat. This has led management to make a move that some investors have been calling for: separate Red Lobster from the Darden business. Right now it looks to be a tax-free spinoff where Red Lobster will become a stand-alone public company, allowing Darden to focus its efforts on the core brands in its Specialty Restaurant Group, which reported comparable sales growth of 4.1% last quarter.
Red Lobster has weighed heavily on the company for years, costing investors plenty of lost opportunity:
What's this got to do with Yum!? Simply put, if Yum! isn't able to reverse course in China in 2014, the weight of an underperforming KFC would have the same affects as Red Lobster is having on Darden's investors today.
Final thoughts: Chipotle may be pricey, but the story is still great
And that story is all about growth, and a powerful mission that resonates with lots of consumers. Even once expansion of the Chipotle brand slows, there are two fantastic concepts ready to accelerate. As great as it's been for investors since 2006, there's plenty of reason to expect the next decade to be nearly as good. Darden and Yum! both could have something to offer, but I'd want to see more clarity on KFC China turning the corner, and Darden's final plans with Red Lobster before committing any capital.
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