The onset of the coronavirus pandemic was not kind to restaurant operator Yum! Brands' (YUM -1.59%) shareholders this year, with the stock down more than 45% as of April. Since then, the shares have made a nice comeback, but remain 6% lower for the year.
With COVID-19 cases on the rise again in the U.S. and other countries, and governments once again taking certain restrictive actions, it is important to look back for clues on how Yum! will perform given these challenges.
A peek back
Yum, with its over 50,000 restaurants (operating under the KFC, Pizza Hut, and Taco Bell banners), felt the impact of rules that restricted dining out. Its restaurants are mostly franchised units, which means the franchisees pay the company a monthly fee, typically 4% to 6%, based on their sales.
Therefore, when the restaurants had to close to the public, this hurt Yum's sales. You can see this by looking at the company's second-quarter results, which saw same-store sales (comps) fall by 15%.
Yum takes action
During the period, management took steps to allow its restaurants to operate, including contactless curbside pickup and online ordering. In the third quarter, digital sales grew by more than 25% year over year to $4 billion. This is a point of emphasis for management, and its choice of Lauren Hobart, Dick's Sporting Goods' president, to join Yum's board of directors reflects that direction.
However, even with these initiatives and restaurants reopening, Yum's comps were flat for those that were serving customers. While better than the prior quarter, it still showed that people were shying away from Yum's restaurants.
Unfortunately, COVID-19 cases have been rising, with the number of new infections worldwide increasing by 37% over the last two weeks. In the U.S., the number has increased by 41%.
This has already led several governors and mayors to issue or keep in place certain restrictions, such as social distancing and limited indoor dining. For instance, New York City limits indoor dining to 25% capacity.
Yum is also facing other headwinds, such as a challenging economic environment. During the last decade's recession, its U.S. comps fell by 5% in 2009. Of course, this is not your typical downturn, but it is plausible that people will cut back on this type of discretionary spending, even though Yum's fast food offerings are less expensive than other venues, such as casual dining chains.
Certainly, these conditions don't bode well for Yum's business. At the very least, it creates uncertainty as to whether its restaurants will have to close again and results will slip like they did in the second quarter. The resurgence of the coronavirus also means people might voluntarily choose not to eat out or even avoid picking up food at KFC, Pizza Hut, or Taco Bell.
At this point in time, you should drive by Yum! Brands without picking up any shares.