Yum! Brands' (NYSE:YUM) third-quarter report featured strong results from KFC and Taco Bell, while Pizza Hut continues to struggle. Analyst Seth Jayson examines the company's strengths and discusses how Pizza Hut might get out of the doldrums.
We also look at eBay's (NASDAQ:EBAY) latest quarter and another blue-chip stock cutting its dividend. Plus, Seth and Chris Hill share a few highlights -- and lowlights -- from Sunday's Marine Corps Marathon.
A full transcript follows the video.
This video was recorded on Oct. 31, 2018.
Chris Hill: It's Wednesday, October 31st. Happy Halloween! Welcome to Market Foolery! I'm Chris Hill. With me in studio, the always-scary Seth Jayson.
Seth Jayson: I thought you might introduce me as David Pumpkins, which was a terrible skit that for some reason has had a lot of legs on Saturday Night Live. They did a whole animated episode or something.
Hill: We'll get to the earnings. Don't worry.
Jayson: But first, David Pumpkins.
Hill: It's Earningspalooza. We're going to get to the earnings. But I will say, I've never seen that skit on Saturday Night Live.
Jayson: Oh, it's so good.
Hill: But producer Dan Boyd and I were up in New York City recently. We were at 30 Rock, 30 Rockefeller Plaza, and walking around the store where they're selling all of the NBC merchandise. They didn't have a lot of SNL stuff. Right, Dan? But they did have some David Pumpkins.
Dan Boyd: Yeah. They had the original suit that Tom Hanks wore for that skit. I've never met Tom Hanks, but judging by his clothing size, he's not a large man.
Hill: [laughs] Do you think it was the actual suit? The one he wore?
Boyd: That's what the label said on the thing. I mean, hey, cool, right?
Hill: We're going to dip into the Fool mailbag. Last week on Motley Fool Money, we were out in Denver, so we broadcast some interviews that we had done previously. This week on Motley Fool Money, its Earningspalooza, so no interviews this week, no external guests. It's just going to be all earnings, all the time.
Jayson: And no pot smoking anymore.
Hill: Not anymore. Which is my way of saying, we're not going to talk about Facebook today, but we will on Motley Fool Money this weekend. Let's start with Yum! Brands, parent company of KFC, Pizza Hut, Taco Bell.
Jayson: Taco Bell, voted #1 Mexican restaurant in the country, according to the Harris Poll recently. Beating out Chipotle and the Moe's.
Hill: Stop me if you've heard this before when it comes to Yum! Brands' quarterly results --
Jayson: They were good.
Hill: Well, I was going to say, third quarter profits and revenue came in higher than expected. The "stop me if you've heard this before" part was that KFC and Taco Bell made up for the weakness in Pizza Hut.
Jayson: Can I ignore Pizza Hut? They seem really desperate, I don't know where I saw this, I think they were trying to go viral. They put up a robot in the back of a pickup truck to supposedly make pizzas. The robot can gather the ingredients and put them in. It sounded like a real gimmick. But I thought, the only thing that could make Pizza Hut pizza worse is if you made it in the back of a pickup truck.
Hill: [laughs] Was this a TV commercial, they're promoting?
Jayson: I only read, like, Bloomberg, so it must have been in a news feed. Anyways. Yum did very well. You saw the numbers. The comp at KFC, it's all twisted up, because you've got international growth and everything. But it's still strong. It's strong at KFC, strong at Taco Bell. Taco Bell's comp is better than Chipotle's comp. Chipotle's comp was all on price increases. Taco Bell makes its comp by lowering prices, hitting the right value points and having people come in for lunch boxes and trying out new things. I don't know how it got voted the best Mexican restaurant based on what's at Taco Bell, but Taco Bell after the marathon, how much were you craving salt and grease? If there had been a Taco Bell at the finish line, I would have been in there.
Hill: [laughs] We'll get to the Marine Corps Marathon at the end of the show. Yes, at a certain point, later. But no, not right after the finish line. Right after the finish line, I was looking to just go home.
Jayson: A little cardboard box had melted cheese and tortilla chips in it.
Hill: That, I did have.
Jayson: [laughs] I knew it.
Hill: You mentioned international. That's part of the problem that they're facing with Pizza Hut. Half of their locations are outside the United States. Pizza Hut is really trying to balance the dining experience with the delivery that people crave. And that's not really working outside the United States. Say what you want about weak comps in the United States, at least they were positive for Pizza Hut.
Jayson: I don't know, maybe I'm secretly European, I don't get takeout and delivery at all. I can't stand cold food. Pizza is one of the few things I would order takeout. If it's lukewarm, it's not horrible. But a lot of places, they just don't think the idea of a pizza delivered to you, or any food delivered you and not fairly hot, is appetizing. Sometimes I wonder if they should just get rid of Pizza Hut. Get rid of that piece and have nothing but good news every quarter.
Hill: It's a legitimate question. We've certainly seen other restaurant conglomerates spin off or just outright sell one of their brands. Darden Restaurants sold Red Lobster a few years ago. They were able to focus a bit more on what they had in their portfolio. That worked.
Jayson: Private equity guys out there, completely full of themselves, they would think, "Oh, I can do a better job with Pizza Hut." Let them have a try.
Hill: They have 11,000 locations. It's so big.
Jayson: You probably can't unpack it. But when you watch the rest of the business, you wish you could see the purer version. This is a pretty good company. Good cash flow, margins are nice, for selling such a low-end product. Again, I compare to Chipotle's earnings. Chipotle's margins, no good. The comp, flat. One of these is selling supposedly higher quality food. The other one is selling the food that people are actually buying.
Hill: It's interesting, because now, Brian Niccol, formerly of Taco Bell, is the head of Chipotle.
Jayson: They moved the HQ to be next to his house out there in California. Chipotle is now headquartered a couple miles from Taco Bell, I guess.
Hill: Here's an interesting stat. I'll be curious to see if Brian Niccol can start to pull some of the promotional levers at Chipotle that they've been pulling at Taco Bell. Here's a fun stat. This most recent quarter, more than one in four orders at Taco Bell included nacho fries, their latest promotion. So it's like, say what you want about nacho fries, and I haven't tried them, but they got people in the door.
Jayson: It's part of their DNA, surprising menu items. Chipotle has a few things in the pipeline, they said on their call. But they're never going to be gimmicky. What Taco Bell has going for is, the irony is part of why you might go there. You go there despite the fact that it's Taco Bell. Chipotle can't really be as playful. They have to stick with their "food with integrity." Niccol sticks with that message in the call. I don't think they're ever going to get as jiggy with the menu as Taco Bell would. Actually, I own a lot of this stock, and I still wonder why, here's a company with flat sales trading at 60X earnings, sometimes, and then you could have Taco Bell doing a better job trading at a much lower multiple.
Hill: Let's move on to eBay. Third quarter profits came in a little higher than expected. The stock was up pretty nicely after hours yesterday and right when the market opened today. It's still positive, but it's only up 2-3%. I say this as an eBay shareholder: that feels right to me. This was not an amazing quarter.
Jayson: I wonder if eBay's "growth" -- can anyone see my finger quotes on the podcast?
Hill: No, it's an audio podcast.
Jayson: I wonder if the eBay's "growth" is not there anymore. I actually like eBay a lot as a consumer. I get bicycle parts there straight from the source. It's a much better place to do that than Amazon. And I do a lot of selling of stuff on eBay. But it seems like they've reached most of the market they're going to get. Everyone thought it was going to be bad after the PayPal earnings, apparently. They said, eBay, not so good for us. It was better than people expected. But still not awesome. I think the days of putting eBay into the pile of fast growers that are worth a high multiple may be gone for good.
Hill: The stock is down more than 20% over the past year. I understand why it's up a little bit today, but it's hard for me to look at this company and figure out where significant growth is going to come from.
Jayson: Yeah. There's going to be pressure with goods coming straight from China. The cheap mail ending from China, which will end soon thanks to presidential action. It actually does make some sense. China's not a third world developing economy anymore, and probably doesn't need super cheap postal rates. You're not going to be able to get $0.70 yoga pants mailed to you from China for $0.25 anymore. That's probably going to take something away from eBay.
I just think that people in general have only so big a tolerance for what some of us think of as fleaBay. When you buy stuff on eBay, I like buying used kids shoes and clothes on eBay, because my kid is just going to wreck them. I know what I need in certain items. But you don't go there generally for a high-quality experience. So, maybe they've reached the limit.
Hill: Our email address is email@example.com. From Tom Smith in Antioch, California. Tom writes, "Just wondering if you had any thoughts on Anheuser-Busch InBev's announcement that they're cutting their dividend by 50%." Well, given that yesterday, General Electric cut their quarterly dividend by 92%, I suppose by comparison, it doesn't look quite as bad.
Jayson: There's a certain point in time where you have to quit with the borrowing, especially when borrowing costs are going up, and paying it out to people. Unfortunately, the stocks tend to suffer when that happens for a couple of reasons. One is, people sour on them individually. But the other is that certain funds and indices have to automatically boot stocks out right when they pay below a certain level. That leads downward pressure. When we were talking about the show this morning, I'm surprised this didn't happen earlier. I remember years ago wondering why everybody was always so excited about Anheuser-Busch. To me, it looked like a company that was mostly just borrowing money and paying dividends. I remember getting a long-winded email from somebody who was a lot smarter than I was, at least that's what he told me, not in those words, but that was the implication, that this was just smart finances. Well, I guess he was right for like 14 years. 14 years of right.
Hill: There certainly was a good stretch of time when, as we talked about, there was free money forever, the cost of borrowing was incredibly cheap. You had a lot of large companies running the numbers and saying, "Why wouldn't we borrow money when it's this cheap?"
Jayson: "Especially when we can tout that dividend?" And the competitive dynamic is also going to be different now, especially in terms of beer. Years ago, we didn't have nearly so much competition in the beer market as you do now. There's small brands, medium brands. It's just a different landscape. But in general, the thing is, if you're an investor, if you're ahold of a company where this is their primary means of financing or increasing a dividend, probably someday that's going to stop.
Jayson: I'm making some money!
Hill: Still below where it was two, three years ago. When we were talking this morning, you were sounding a little bearish.
Jayson: I read that report expecting to see something awesome. What I saw was not so great. People must really have thought they were going to turn in another stinker.
Hill: Yes. They did.
Jayson: I told my colleagues, "If you had handed me this earnings report the day before and said, you can go ahead and trade on this, I would have traded 180 degrees the wrong way." The growth is still flat except for international, but even the international growth isn't what it was. Flat sales in the U.S. We're in a different world now, with the big retail chains not being so big, and some of them not around anymore. Even Under Armour's online sales were flattish. Their excuse was, "That's comparing to last year. We had a lot of sales last year." Well, you just told me that you're not going to get any growth in your online sales unless you are giving people a discount. To me, that says your brand is tired, it's weak, it's a clown brand. A clown brand, bro. We were talking about that earlier.
I wonder. They have this marketing strategy to sell certain kinds of stuff at a lower price, but they still talk about wanting to be a premium brand, "We're going to be a full-price brand." I wonder if people really think of Under Armour as a full-price brand. They talk about, their DNA is providing better stuff. I'm a huge fan of HeatGear, by the way. I wear that stuff. It's super tight, and when I'm running in the heat, it actually is better stuff. But a lot of the stuff they sell -- ceramic-infused fabric that you put something on, it's supposed to use your body heat to heal your muscles after a hard workout -- come on. I mean, come on. We all know that's absolute crock. That's kind of the name of the game in all sports performance apparel, a lot of it is just salesmanship. But when you see Lululemon continuing to sell and grow sales at a really high rate, and we're at a huge high in consumer confidence right now, and Under Armour is putting in this kind of a performance, what are they going to do if the economy actually turns south and people stop buying stuff?
Hill: You touched on something with the marketing that dovetails with something I read yesterday. In comparing Under Armour to Nike, one of the challenges that Under Armour has -- and maybe they're working on this -- if you think about Nike -- and, yes, Nike is a much more established company, so they've had more time to do this -- there's a much more established brand, and there's an ethos to the overall Nike brand. With Under Armour, it's almost like Under Armour is a collection of sub-brands. If they're going after the running market, it's one thing. If they're going after basketball, football, whatever ... they don't really have a collective brand presence in the way that Nike does.
Jayson: Yeah, it feels a little bit that way. It's sort of scattershot. Their running shoe effort for a while was really flailing. I guess it does OK now, but you look at what they're selling, and there's not a lot there. They've come up with an acronym, HOVR, for their EVA foam. It's just shoe foam. One of the things they did where they were at a disadvantage is being able to release retro shoes. They weren't around. When I was downloading the call to read it, I thought, "Under Armour should just go ahead and make up a fake retro shoe." And then I read the call, and I see they did that. [laughs] They made up a fake 90s shoe and sold it as a retro shoe. Of course, you sell a small number of them, and they sell out, and you get a bunch of free viral marketing out of having sold people this new buck and mesh shoe. So, I guess, good for them. But they're at a disadvantage when that is the kind of place that Nike and Adidas can see a lot of growth in, because they just don't really play in that space.
Hill: How was the Marine Corps marathon for you?
Jayson: Speaking of crummy shoes. Speaking of being sick to your stomach. It was my retirement marathon, the last one I'm going to do, as far as I know. I should have been able to run somewhere around a three from my training paces.
Hill: Three hours.
Jayson: Three hours. I got there and started running, and I thought, "That's not going to happen." I was trying to slow down. I had a hard time. I wasn't looking at my watch but keeping a somewhat hot pace. My knee, it's been bothering me for years, was tight. By the time I finally settled in and was headed for around a 3:12 type time, and satisfied with that, then my guts rebelled on me. I spent eight miles desperately looking for a portajohn.
Jayson: When you've got this squeezies, you're not running your strongest.
Hill: Well, and, as we were chatting on our Slack channel for runners here at The Motley Fool, it is kind of surprising that the Marine Corps Marathon, which is so well organized, and has Gatorade and water every two miles, had an eight-mile stretch with no portajohns. [laughs]
Jayson: To be fair, maybe I missed them. But, I was desperately looking for them, and I didn't see them. I did see two portajohns near the Smithsonian. I don't know if they were for the race, though, and there was a long line of tourists, so there was no way I was stopping there.
Hill: They should have let you cut, you had a bib on. [laughs]
Jayson: I was going to run into a restaurant, Crystal City. But this is kind of part of the fun of a marathon, right? Stuff happens that doesn't go to plan, and you have to get through it. I still got in at 3:17 or just under that, which is fine. But you had a huge victory. No medical tent this year.
Hill: No medical tent, which was amazing, thanks to the weather, which was about 25 degrees cooler than the last year's.
Jayson: Perfect weather.
Hill: Yeah, it was great weather. Thank you to the Marine Corps Marathon folks for arranging great weather.
Jayson: And not even all that much wind. It wasn't too bad. Although, you said the bridge was a little windier for you. There's a there's a bridge, for those of you who don't know the course, which is everybody. It's actually very cool, because at mile 20, you're falling apart. Almost everybody's hitting the wall. And then there's this mile and a half of this terrible highway bridge over the river, which is completely desolate. And I love challenges like that in a marathon.
Hill: Oh, you're the one.
Jayson: I love that kind of thing. There's no glory here, there's nobody cheering. You get to reach down inside and see if you are really tough enough. It just felt easier this year, despite the squeezies.
Hill: [laughs] Nice. Yeah, weather definitely helped. No medical tent for me. I was about 14.5 minutes faster than last year. That was nice. New PR.
Jayson: What was your time?
Hill: 4:46. So, yeah, you were cooling your heels for a good 90 minutes by the time I crossed the finish line.
Jayson: I was probably in the bathroom at Fool HQ at that point in time. It was great. My wife and daughter were right at the finish line, so I got to go over and give them a smooch. I decided years ago, the first time they came to see me at a marathon and I ran over and give them a kiss, that I would never, ever skip them if I saw them at a race. I would never blow by. If I could get to them, I would always go over and give them a kiss. Running a marathon is really selfish thing. You train a lot. Your family pays. And the least I could do is that. So, in my 85th race, I managed to also get that done. Never skipped it. I felt like that was good.
Hill: Nice. So, you've done 85 marathons in your lifetime. Between the two of us, we've done ... let me do the math ... 88 marathons. Kudos to the two of us. [laughs]
Jayson: Kudos to the two of us. It's not even that many. I know so many lunatics who have done hundreds.
Hill: I guarantee you almost everyone listening right now is shaking their head, not at me, at you. They're like, "What? 85 marathons? That's a crazy person."
Jayson: I'm retiring because I would just rather spend time with my kid. I'm not as fast as I was. In 2015, I would run an under three anytime. 2:50 was my PR, which isn't that great, but it's respectable. And I can't do it anymore. Really, I'm not courageous enough to run slow races. I have more fun when I'm running quickly. So, I'd just rather hang out with my wife and kid. But I'll come and cheer for you.
Hill: I don't know if I'm joining you in retirement or not. I'm going to wait for my legs to stop hurting.
Jayson: How do they feel? I woke up this morning, and I didn't remember that I had run a marathon, so I feel like I'm good.
Hill: Oh, really?
Hill: Oh, no, I totally remember. [laughs]
Jayson: You still remember now?
Hill: Yeah. Any time I'm dealing with stairs, I absolutely remember that on Sunday, I was running a marathon.
Jayson: Yeah. Those of you who haven't done it, it's not going upstairs.
Hill: It's not!
Jayson: It's going downstairs. You accelerate. Your legs are beat, they're shredded, and you can't push back.
Hill: That gives me a great opportunity to say thank you to the listeners who have emailed me and hit me up on Twitter before and after the race offering support. Thank you very much for that. You just reminded me that it was two years ago, I had done my first one. I remember, I go to the medical tent, then I get home and rest. I'm sore, but I'm OK. And I wake up in bed Monday morning, I'm just lying in bed, I'm looking at my phone. I have an email from a listener who's in Europe. He sends me this email saying, "Hey, if you're reading this, you've completed your marathon. Congratulations. I've done some marathons in my lifetime. Here's a tip."
Jayson: Use the handrail? [laughs]
Hill: No, no. He said, "Here's a tip. When you go downstairs, walk downstairs backwards. Go down backwards. It'll be easier on your legs." And I sort of made a face when I was looking at that. I was like, "What is he talking about?"
Jayson: "Maybe in that hemisphere, it works."
Hill: I just thought, "Well, I'm not having any trouble with stairs," and then I got out of bed. And every muscle in my legs was screaming at me. And, in fact, the next two to three days, I was going downstairs backwards, much to the delight of my children, who were laughing at me.
Jayson: It's called delayed onset muscle soreness, or DOMS, for a reason. After the race, it's not so bad. The next day ... Though, my legs didn't hurt that much this time around. I was actually a little disappointed. I kind of like that, really sore legs after a marathon. Then you know you did some work.
Hill: What an obnoxious thing to say. [laughs] "I'm so upset that I wasn't in more pain!"
Jayson: That's why you do those.
Hill: That's why you do them. That's not why I do them.
Jayson: A long time ago, I quit taking ibuprofen or anything after a race. One day, I just said to myself, "You paid good money for those sore legs, so enjoy it." [laughs] It's weird. You just turn a switch in your head. Turn that switch!
Hill: I'll see if I can do that. Seth Jason, thanks for being here. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of AMZN, eBay, PYPL, Under Armour (A Shares), and Under Armour (C Shares). Seth Jayson owns shares of CMG, LULU, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends AMZN, CMG, FB, PYPL, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: short November 2018 $155 calls on FB, long November 2018 $135 puts on FB, and short January 2019 $82 calls on PYPL. The Motley Fool recommends eBay, LULU, and NKE. The Motley Fool has a disclosure policy.