Investors weren't thrilled with the latest earnings results last week out of Yum! Brands (YUM 2.85%), and they made that judgement clear by sending shares down almost 10% in the immediate wake of the report. The world's biggest fast-food chain by restaurant count saw mixed demand trends across its empire of chicken, pizza, and Tex-Mex treats.
In a conference call with analysts, outgoing CEO Greg Creed and his team put those results into perspective, stressing the positives they see in the Taco Bell and KFC franchises while warning that the rebound plan for Pizza Hut will bring "disruption and choppiness" over the next few quarters.
Here are a few highlights from that presentation to investors.
Not standing still
"Third-quarter results were healthy and consistent with our long-term growth model. Yum! delivered third quarter system sales growth of 8%, including 3% same-store sales growth and 7% net-new unit growth. While we're pleased with our results, we know there is always work to be done." -– Creed
Executives said the overall results met their expectations, with standout performances by Taco Bell and KFC more than offsetting struggles at Pizza Hut. KFC, Yum's biggest division, managed 3% higher comparable-store sales, with demand especially strong in India, Russia, and Australia. Taco Bell stumbled with an ill-fated Cheetos sandwich promotion but still managed robust sales gains.
Pizza Hut was a different story, with comps falling 3% in the core U.S. market. Executives said growth decelerated in part because menu changes aimed at boosting franchisee margins ended up driving away customers.
Pizza Hut challenges
"We caution [that] we could see a continuation of soft sales and unit contraction throughout 2020 in the Pizza Hut U.S. business. Of course, we know that when we have great franchise operators running first class assets that are well positioned in trade areas to serve customers, we win in the marketplace and the Pizza Hut team is working hard to accelerate this transition." –- COO David Gibbs
Executives said the Pizza Hut team has made encouraging strides toward improving the customer experience and preparing for a delivery and carryout-focused industry. The partnership with Grubhub, which handles orders while Pizza Hut runs the deliveries, is the best setup for now, they say.
Still, the company is reorganizing the pizza chain's operating structure while closing underperforming locations in the U.S. These changes are likely to cause disruptions for franchisees and for sales and profit flow over at least the next few quarters.
"Everywhere we operate, we need to continue elevating and investing in a world-class customer experience with unrivaled talent, modern assets and the best operations with disruptive and innovative technology. This effort will only be realized through a strong partnership with our 2,000 franchisees who run our restaurants." –- Gibbs
Gibbs is stepping in as CEO in January and taking over for Creed, who has held that position since 2015. Investors have every reason to expect a smooth transition given that these two executives have worked together for years.
On that score, Yum! Brands affirmed its long-term growth model that calls for comp sales growth of between 2% and 3% and aggressive store expansion of about 4%, even after accounting for closures in the Pizza Hut brand. These metrics should yield revenue growth of nearly 10% and earnings per share that rises in the low double-digit range.
Total shareholder return, management believes, will still reach into the mid-teen-percentage range after including dividends and stock repurchases.