With 2005 in the history books, it's time for the performance reviews. Let's take a look today at Yum! Brands (NYSE:YUM), which has reported same-store sales figures for the full year -- an important metric in determining the health of this multi-brand restaurant chain.
The three franchises that make up Yum! Brands -- KFC, Pizza Hut, and Taco Bell -- achieved an overall comp increase of 4% in 2005. That may not sound like a huge expansion of sales, but let's look at some of the previous years. In 2004, the company saw an overall comp increase of 3%, while it had no increase at all in 2003, just 2% in 2002, and a mere 1% in 2001. Stacked against those numbers, last year looked pretty good, and the trend is on the right track.
Whether they dish out clothes or chicken, tacos, and pizzas, retailers place a good deal of weight on same-store sales, because even though companies can grow sales by opening new stores, knowing the sales growth at older locations -- those open for more than a year -- is a powerful indicator of how much strength the company still has and how much value can be created. In the case of Yum!, the company isn't expected to expand rapidly through the opening of new stores, since it has more than 31,000 already. So getting the most from existing locations is how management will create value.
To do so, management has a trick or two up its sleeve. The company is banking in part on its multibrand restaurant strategy, which places two of its concepts under a single roof. These stores tend to produce higher sales than those with a single offering and can reduce operating costs. I especially like the multibranding idea and see it as creating an extremely compelling case for shareholders.
One important takeaway for investors here is that Yum! is not going to behave like a frantically climbing tech equity of the late '90s. That's why it's vital to get in at a good price. Considering that the company's annual operational cash flow hasn't grown significantly in the past few years (although I think it will as time goes on), the current PEG ratio is 1.6, and the yield is a measly 0.9%, I believe that investors would be well served by waiting for a better entry point.
There's no question that Yum! can create a lot of value over time because of its brand equity or that it will remain a formidable competitor against McDonald's (NYSE:MCD) and Wendy's (NYSE:WEN). With opportunities for growth via expansion, product innovation, and entry into international territories, Yum! Brands offers a good opportunity when the price is more in line with a proper valuation.
More Takes on Yum! Brands and its competitors:
- Finger-Lickin' Good Results
- Yum!'s China Scare
- McDonald's: Why Don't You Just . ?
- Mixed Grill at Wendy's
Post your opinion on Yum! Brands at the company's Foolish discussion board.
Fool contributor Steven Mallas owns none of the companies mentioned. The Motley Fool has a disclosure policy.
