Investors paying high prices for the rapid domestic growth of Chipotle (NYSE: CMG) should take closer notice of Yum! Brands (NYSE: YUM), a global story that is still in is still in its early stages. Yum!, already the largest global operator of quick service restaurants, has recently decided to sell its mainly domestic brands Long John Silver's and A&W All-American Restaurants when the right opportunity presents itself. Yum! is selling these brands so it can focus on the continuous growth of its core international brands such as Taco Bell, Pizza Hut, and KFC.
Yum! is not expecting to make a substantial gains from the sale of these domestic brands, but it believes these chains don't have significant growth potential in international markets, and instead would like to focus its efforts on the phenomenal growth it is currently achieving with its core brands. This staggering growth began when Yum! Brands was spun off from PepsiCo in 1998, when only 22% of Yum!'s profit came from its international operations. Today that number is 65%, and the company plans for it to rise to 75% by 2015.
The majority of this growth has come from China, as the Chinese economy has become more "Americanized" over the last couple of decades, and many Chinese consumers looked at American restaurants such as McDonald's (NYSE: MCD) and KFC as a luxury or status symbol. However, while many would think McDonald's as America's largest player there, Yum!'s nearly 3,600 locations gives the company three times as many restaurants in China as the Golden Arches. In Yum!'s most recent quarter, its China stores were responsible for 41% of the company's total revenue.
While Yum! continues to expand rapidly in China, it is not the company's fastest-growing country any more. That title belongs to India, where the company expects to grow revenue between 35%-45% during 2011. This revenue increase will certainly be aided by new store openings, but management believes that same-store sales will also increase in the mid-teens percentage-wise.
Global good, domestic bad?
I believe Yum!'s decision to sell these businesses is mainly due to the greater opportunity for growth abroad, but it also speaks to the changing taste of American consumers. The last few years have seen the emergence of quick-casual restaurants, such as Panera Bread (Nasdaq: PNRA), Chipotle, and Einstein Noah Restaurant Group (Nasdaq: BAGL), that offer consumers healthier and fresher dining options. As a result, many of the traditional fast food chains have seen sales slow over the last few years, including Yum! which has seen its U.S. revenue decline every year since 2006. By unloading Long John Silver's and A&W All-American Restaurants I believe Yum! will be able to focus on stabilizing its core brands in the U.S. and continuing the rapid expansion abroad.
Yummier than Chipotle
We often hear the tremendous growth story of Chipotle, and certainly this future growth can be seen in the valuation that is given to shares of its stock. However, I am a much more avid fan of the Yum! growth story, especially considering the valuations investors have given to each company. Chipotle does plan on opening nearly 145 new stores this year, but the trajectory of growth from these openings is beginning to slow. With over 1,000 restaurants, Chipotle is already in most major cities.
On the other hand, Yum! is really just beginning in Asia. In 2011, it plans on opening more than 1,400 new units internationally, which includes 475 in China. And Yum! CEO David Novak believes that the company could one day have 20,000 units in China. Add in the growth potential of India, South Korea, Russia, and others, and that is some stellar opportunity!
Sure, Chipotle has plenty of opportunity for growth overseas, but I'm unwilling to bet on success without seeing how Chipotle is able to manage any type of international growth. In addition, one of the key reasons for Chipotle's success is a limited menu that doesn't change much, cutting down on operating expenses. Yum! has been so successful overseas because it has been able to adapt its menu to please consumers of different cultures all over the world. This is something that McDonald's and Starbucks (Nasdaq: SBUX) have struggled with in China. Will Chipotle be able to manage these cultural differences and do so profitably?
Include the 2% dividend, and an enterprise value/EBITDA of 10.4 compared to Chipotle's stratospheric 20.5 valuation and the choice seems easy to me.
