The restaurant recession may be in the rearview mirror, but it's still no picnic to compete in the quick-serve space. That's true even for fast-food powerhouse Yum! Brands (NYSE:YUM), shares of which last week neared an all-time high thanks to the impressive sales growth at Taco Bell and KFC.
Its Pizza Hut chain remains a weak link, and this segment of the Motley Fool Money podcast begins with host Chris Hill and Fool senior analysts Ron Gross, Matt Argersinger, and Jason Moser talking about the outlook for Pizza Hut in light of its new NFL sponsorship, Yum!'s Grubhub (NYSE:GRUB) partnership, the financials, nacho fries, and more. Then they shift to Shake Shack (NYSE:SHAK), which is not quite justifying the high earnings multiple the market has placed on its stock. Comps fell 0.7% last quarter, and traffic is off 4%, but revenue is rising thanks to store count growth. One issue the Fools have with its strategy -- the nearly total lack of promotional efforts.
A full transcript follows the video.
This video was recorded on Nov. 2, 2018.
Chris Hill: Shares of Yum! Brands got close to an all-time high this week, after third-quarter profits and revenue came in higher than expected. Once again, Jason, we saw KFC and Taco Bell doing the heavy lifting, making up for weakness at Pizza Hut.
Jason Moser: The old saying goes, two out of three ain't bad. That's essentially Yum!'s quarter in a taco shell. A crunchy taco shell. Yeah, KFC and Taco Bell continue to shine. Taco Bell is about 30% of total operating profit. System sales grew 8%. KFC, which is essentially half of the company's operating profit, was another source of strength, with same-store sales growth of 3%. If you also recall, earlier in the year, Yum! Brands made an investment in Grubhub. They bought $200 million worth of stock from Grubhub. That gave Grubhub some much-needed capital, also tied the two together to really focus on getting more sales out there, in regard to KFC and Taco Bell. Pizza Hut is the --
Ron Gross: Worst pizza around.
Moser: [laughs] It's not good pizza, I'm not going to lie. They have some work to do, no question. It seems like an opportune time, given Papa John's weakness.
Hill: I was just going to say, given everything that has happened over the past 12 months with Papa John's, how is Pizza Hut not taking advantage of this?
Moser: I think this time next year, we'll have a better idea. That's mainly because they've taken over as the NFL's main sponsor. That has the potential to really help them get this thing going back in the right direction. But we're not going to know for at least a little while. To Ron's point, they could probably focus on improving that product a little bit.
Gross: You don't like ketchup on bread?
Matt Argersinger: [laughs] Oh, gosh, harsh!
Moser: It's not my thing. It's worth noting they've essentially reached their goal of 98% franchised operations. Management is committed to giving back $6.5 [billion to] $7 billion to shareholders through 2019 via repurchases and dividends. As a quick-service restaurant, the pizza is not the best in the world. I don't ever eat at Taco Bell, and I can't remember the last time I ate at KFC. But apparently, people are going there, because they're chalking up a lot of sales.
Gross: And because KFC's delicious.
Moser: I would push back on that one.
Hill: Do you know what else Taco Bell does a really good job of? They do a really good job with promotional items. One of the things that came out in this quarter was, the nacho fries promotion -- which I did not partake in, and apparently, I was in the minority, because that was involved in more than a quarter of every ticket they had.
Moser: Hey, let's relive that Red Sox victory one more time. Remember when Mookie Betts stole second base? They're giving away a free Doritos taco or whatever it was. So I have to imagine some people went in there and took advantage of that as well.
Argersinger: I love the Mookie!
Hill: Shake Shack, falling more than 11% on Friday after a weak third-quarter report with negative comps, Ron.
Gross: The report wasn't horrible, but those top-line numbers certainly scare investors when you have a stock that's priced pretty to perfection. Comp store sales down 0.7%, which is actually an improvement from the 1.6% decline last quarter. Silver lining there. A 4% decrease in guest traffic. I'm no analyst, but I think you probably don't want to see that at a restaurant. They had revenue up 26.5%. That's largely because they keep opening new stores. They did raise full-year revenue outlook, which is interesting based on those metrics that I just went through. That's curious. They'll continue to open new stores. They expect to open 36-40 additional stores in 2019. That will continue to drive revenue. We obviously need to see this filtering down into margins and earnings.
Hill: Let me go back to Taco Bell for a second. You look at Shake Shack. They make a good product. But from a business standpoint, they don't appear anytime soon to be employing any sort of a promotional strategy in the same way that Taco Bell does, whether it's discounting or any sort of one-time items. To your point about them raising guidance, I'm not entirely sure what rabbit they're going to pull out of their hat to make that happen.
Gross: A Shake Shack opened around the corner from my house. I've seen no promotion whatsoever. You drive by; you see it or you don't. You either go in or you don't. I've seen nothing about it.
Moser: And you know how that ends. Chipotle ran their business very much that way for a long time. Eventually, something slips, and you've got to start promoting.
Argersinger: Even after Friday's big fall in the stock price, the market cap of the company is still about $1.8 billion. That means each of the 180 Shacks is valued at $10 million.
Gross: That's high.
Argersinger: Ron is here throwing out negative comps, and I'm thinking to myself, "How in the world could each Shack be worth $10 million?" That's a little high.
Chris Hill has no position in any of the stocks mentioned. Jason Moser owns shares of Chipotle Mexican Grill. Matthew Argersinger owns shares of Chipotle Mexican Grill. Ron Gross has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool is short shares of Papa John's International and has the following options: long November 2018 $55 calls on Papa John's International. The Motley Fool has a disclosure policy.