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Is Yum! Brands Stock a Buy?

By Anne Burdakin - Aug 9, 2020 at 9:14AM

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Digital sales growth is helping the fast-food chain weather the pandemic.

Yum! Brands (YUM 0.38%), the delicious-sounding parent company of quick service restaurant chains Kentucky Fried Chicken, Pizza Hut, Taco Bell, and Habit Burger Grill, was sailing along as 2020 began. It had successfully transitioned to a pure franchise model and turned around the KFC business. Overall, its various banners generated more than $50 billion in system-wide sales and opened their 50,000th store in 2019.

Then, the coronavirus pandemic hit, and like all restaurant operators, Yum! Brands was challenged to adapt with some drastic measures. The latest quarterly results show the company is on track to meet that challenge and possibly emerge from the COVID-19 crisis as an even stronger company.

Working hard to adapt

Adjusting to a new reality of touchless service and delivery hasn't been easy, and customers have been skittish. When the company reported second-quarter results on July 30, it revealed sales declines for all three of its major brands.

But management has stepped up to the plate in this difficult sales environment, delivering operating efficiencies that resulted in adjusted earnings per share of $0.82, which handily beat analysts' expectations of $0.54 per share. Company revenue, though, fell 9% year over year to $1.2 billion.

Digital sales were a bright spot in the quarter, jumping more than $1 billion year over year to $3.5 billion. About 95% of the company's restaurants worldwide are now at least partially open.

Same-store sales were down 15% for the company overall. Management attributed those declines to temporary store closures, which peaked in early April at about 11,000 restaurants. It has been steadily reopening locations for delivery and takeout, though most dining rooms remain closed.

A food service employee delivers food while wearing a mask and gloves.

Image Source: Getty Images

"We are encouraged about our continued store reopenings, the general financial health of our global franchisee base, and our own strong liquidity and balance sheet," said CEO David Gibbs. "Just as importantly, same-store sales trends for open stores stabilized in June just a few points short of flat, and despite the majority of our dining rooms still being closed, these trends have continued into July."

Building a base for recovery takes time

Yum! Brands turned in good second-quarter results considering the incredibly difficult circumstances restaurants have been dealing with during the COVID-19 pandemic. By pivoting as quickly as it did, the company set the stage for a stronger comeback than many anticipated.

The brands and the Yum! central technology team collaborated quickly to build out the company's digital ordering capabilities. In conjunction with that, its delivery service was ramped up. Over 34,000 of its restaurants offer delivery now, up from about 30,000 at this point last year.

Developing stronger digital ordering technology would have been necessary even without COVID-19, but the crisis sped the effort up and customers are responding positively.

Yum! Brands is the world's largest quick service restaurant company in terms of the number of restaurants operated under its brands. The company's chains serve customers in more than 150 countries, and even with more than 50,000 locations worldwide, it has plenty of room to grow. The company spun off its China operations as an independent, publicly-traded company in 2016. Management acknowledges there are opportunities for international growth, but the company intends to hold off such expansion until after the pandemic has been brought under control.

What does this mean for investors?

Even though the fast-food powerhouse is navigating the coronavirus pandemic well, investors remain hesitant, and rightfully so. Yum! Brands stock is down 10% year to date and 22% over the past 12 months, but shares still trade at a trailing price-to-earnings ratio of 27.

Yum! Brands has a lot going for it, but cautious investors should wait to see if its results continue to hold strong in the second half of the year before committing to the stock. The restaurant business is difficult in the best of times, but during COVID-19, there are too many potential headwinds that could derail Yum! Brands' progress. As a fan of the food, I still consider the stock a "hold" until the company shows several quarters of resilient financials.

Anne Burdakin has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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