Yum Brands’ Taco Bell Division Remains Its Gem

Image Source: Yum Brands

By Brian Nelson, CFA

Yum Brands (YUM) recently reported third quarter results that came up a bit short relative to the market’s forecast. The owner of KFC, Taco Bell, Pizza Hut, and Habit Burger experienced worldwide system sales growth, excluding foreign currency translation, of 1%, which reflects 5% unit expansion, including 1,029 gross new units in the quarter.

Same store sales fell 4% at KFC and Pizza Hut, while they expanded 4% at Taco Bell in the quarter. Unit growth was most prevalent in its KFC Division, where the number of units expanded by 7%. GAAP operating profit and core operating profit advanced 1% and 3% in the quarter, respectively, led by 11% expansion in its Taco Bell division.

Management had the following to say about the quarter:

I’m incredibly proud of how our teams have navigated such a complex consumer environment to deliver 3% Core Operating Profit growth this quarter. The strengths of our twin growth engines were evident: Taco Bell U.S. significantly outperformed QSR competition with 4% same-store sales growth, and KFC International grew units an impressive 9% year-over-year. KFC International’s unit openings spanned 64 countries this quarter, and year-to-date gross openings are up nearly 150 units year-over-year. While sales have been impacted by pressures relating to geopolitical conflicts and challenged consumer sentiment, our iconic brands which are led by our world-class talent and enabled by Yum!’s unmatched scale and cutting-edge, proprietary tech, are positioned for unstoppable growth.

ESG Matters

Yum Brands’ Good Growth strategy entails three focus areas:

Less Carbon−Reducing greenhouse gas (GHG) emissions from (its) restaurants and supply chain

Better Packaging−Reducing (its) overall waste footprint by finding packaging solutions that are reusable, recyclable or compostable, while also working to eliminate unnecessary and single-use plastics, and intentionally added chemicals of concern

Remove Barriers−Removing barriers to unlock opportunity for employees as well as frontline workers and their communities, all over the world

Yum Brands’ has made some notable strides with respect to ESG at each of its major brands. For example, at KFC, the company requires “green building practices in new restaurants and major remodels.” It incorporates “a new collection of modular, durable furnishings made from recycled materials.” It has also “achieved equal representation for men and women globally in corporate roles.”

At Taco Bell, the company is “working on beef supply chain improvements for better biodiversity and environmental protection as well as better animal health outcomes that require fewer critical medicines.” At Pizza Hut, the company “engages with dairy farmers on sustainable agriculture and carbon reduction initiatives.” At Habit Burger, “all restaurants, no matter where in the U.S. they are located, meet or exceed the California Green Building Standards Code.”

Concluding Thoughts

Among Yum Brands’ third quarter highlights was that digital system sales exceeded $8 billion, with a digital mix over 50% now. Despite the continued unit growth expansion and strength at Taco Bell, earnings per share excluding special charges still fell 5% in the period, to $1.37, down from $1.44 in the same period a year ago. Weakness with respect to same-store sales at KFC and Pizza Hut keep us on the sidelines. We prefer McDonald’s (MCD), Domino’s (DPZ) and Chipotle (CMG) as three of our favorite restaurants.

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