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Yum! Brands Gets a Lift From Opening 1,000 New Stores

By Demitri Kalogeropoulos - Feb 11, 2020 at 8:30AM

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But the fast-food giant's 2020 outlook didn't impress investors.

Investors had modest expectations heading into Yum! Brands' (YUM 1.71%) fiscal fourth-quarter report due to the mixed results they've seen lately. While the fast-food chain has been aggressively expanding its global store base, sales growth at existing locations has been sluggish. Yum! has also been struggling with declines at its Pizza Hut division even as Taco Bell and KFC improve.

On Thursday, the company announced no major changes to that big-picture sales profile as it enters fiscal 2020 and aims to speed up growth over the next few years. Let's take a closer look at the results.

Two people sharing a pizza.

Image source: Getty Images.

Portfolio wins

Revenue rose 10% in the fourth quarter, including a 13% spike at the Taco Bell franchise, 11% gains at KFC, and a 7% increase at Pizza Hut. Much of that gain came from a rising store base, though, as the chain opened a whopping 1,000 new restaurants in the period for a 4% boost in restaurant count.

The comparable-store sales metrics were less impressive. As management warned back in October, the Pizza Hut brand showed stress from the company's pivot toward a more delivery-focused selling approach, and comps declined 2% compared to a flat result last quarter. While KFC and Taco Bell continued growing at a steady pace, the pizza slump led overall comps to slow to 2% from 3% in the third quarter. That's not a terrible result, but it's far from the 6% gains that restaurant peers like McDonald's (NYSE: MCD) and Starbucks (NASDAQ: SBUX) posted for the same period.

Management stressed the fact that Yum! met its broader expansion goals. "We delivered results consistent with our long-term growth algorithm," CEO David Gibbs said in a press release. CFO Chris Turner added, "fourth-quarter results were a solid end to the year where we met or exceeded each component of our guidance."

Financial progress

Yum! Brands showed off the power of its efficient selling model, with adjusted operating profit rising 14% in Q4 and operating margin improving to 42.2% of sales in 2019 compared to 36.3% a year ago. The major drivers of that boost included its refranchising initiative and the 3% comps growth in 2019.

Those wins helped provide plenty of resources management could direct toward acquisitions and shareholder returns. On that score, Yum! spent almost $400 million purchasing the Habit Burger Grill franchise in Q4 and also invested $333 million on stock buybacks.

Looking forward

Gibbs and his team are hopeful that the Habit Burger acquisition will help deliver faster sale growth over the next few years. However, even though 2019 marked the conclusion of management's three-year transformation initiative, investors shouldn't expect a quick return to accelerating sales gains.

In fact, Yum! is projecting comps that land at the low end of the long-term target range of between 2% to 3% in 2020 thanks to pressures from the Pizza Hut brand and the impact of the coronavirus outbreak in China.

Executives noted in the conference call that the company has notched several key wins lately that make it a stronger company, including a stepped-up store expansion pace, faster customer service, and a more diversified portfolio. Yet it might not be until 2021 that shareholders see those improvements translate into accelerating annual sales growth.

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