For Yum! Brands (YUM -1.27%), there's more than meets the eye when it comes to its financials. Though the company in October reported a nine-month decline in total revenue of 5%, adjusted operating profit was up 7.6% year-over-year after adjusting for refranchising gains, while net income would have been up 13.6% year-over-year if volatile investment gains and losses were excluded.
The owner of the KFC and Taco Bell chains of casual dining restaurants has seen a dip in direct company sales, but this has been somewhat offset by a rise in revenue from rental and the sale of franchise rights. Yum! also owns the Pizza Hut and WingStreet brands and can offer customers a wide range of different dining options.
Here are several reasons why Yum! Brands continues to be my favorite restaurant stock.
Growth on many fronts
Yum! Brands in October reported a strong quarter, with same-store sales growth of 3% across the whole group. Of particular note, the KFC division reported its 17th consecutive quarter of positive same-store sales growth, along with a year-over-year increase of 8% in revenue (net of any foreign exchange impact).
Operating margins across the three key divisions also increased year over year in the quarter. The KFC division saw the biggest jump -- 7.6 percentage points -- from 36% to 43.6%, while Pizza Hut and Taco Bell reported low single-digit percentage increases in operating margin.
Steady financial improvement
Yum! Brands' total revenue has dropped over the past five fiscal years -- as can be seen in the chart below -- but investors should note that within these numbers is an increase in revenue from franchisees. If the one-off refranchising gain/loss is removed, adjusted operating profit shows a steady and consistent climb, from $1.5 billion in 2014 to $1.76 billion in 2018. With the initiatives that the company has in store for its brands, as well as the strength of the franchising network, I am confident adjusted operating profit will continue to grow.
Partnership with a food delivery company
KFC U.S. is partnering with GrubHub to add more locations for delivery and "click-and-collect" service. Click-and-collect allows a customer to order online and then drop by the restaurant to pick up his or her order without queuing, eliminating hassle and queues. Yum! COO David Gibbs said during the Q3 2019 conference call that online ordering was officially launched at KFC.com on Oct. 13 and the company at the time of the call had 2,700 KFC stores offering delivery, along with 3,700 stores offering click and collect.
This partnership should enhance the process of online ordering and boost overall business for Yum! Brands. By outsourcing the delivery to a dedicated food logistics partner, KFC can focus on what's important -- ensuring it prepares the right orders and serves up great meals for its customers.
Acquisition of Habit Restaurants
Earlier this month, Yum! Brands announced the planned acquisition of Habit Restaurants (HABT) for $375 million, in a bold move to add a burger chain to its list of restaurant offerings. Management sees this as a good move as the Habit Burger Grill would add a new fast-casual concept with burgers, sandwiches, and salads to Yum! Brands' portfolio of brands. This would allow the company to compete more directly with McDonald's and Restaurant Brands International's Burger King.
Habit Grill brings technological capabilities such as online ordering, a mobile app, and technology-centric solutions to produce favorable store economies. This acquisition is in line with Yum! Brands' move to hire more executives involved in technology and marketing back in September, when it hired Clay Johnson as its chief digital and technology officer and promoted Gavin Felder to chief strategy officer. Johnson will help to accelerate the company's digital journey across mobile, online, delivery and restaurant operations, while Felder will devise long-term strategies for growth and will work with Johnson to integrate information technology solutions (including restaurant automation) across store operations.
Pricing in continued growth
Trading at around 29 times earnings, investors are certainly pricing in continued growth. However, I feel this is a fair price to pay for a business with a great franchise model and a strong portfolio of brands. A recent increase in the quarterly dividend to $0.47 represents the icing on the cake, and the shares offer a forward dividend yield of around 1.8%.
Yum! Brands is embarking on digitalization initiatives to drive further growth in the business (through the strengthening of its franchise network), while also improving engagement with its customer base. The acquisition of Habit should start contributing more meaningfully in 2020, while its existing portfolio of brands should also see continued growth in same-store sales and revenues. Management is hitting the right levers by focusing its attention on digital channels and widening its customer segment base, and investors can look forward to more good news.