Yum Brands Earnings: Modest FVE Increase as Global Technology Narrative Outweighs Consumer Pressure

Wide-moat Yum Brands missed our top- and bottom-line forecasts on softer-than-expected comparable sales performance in its KFC and Pizza Hut segments, but we're encouraged by the firm's commentary regarding its ability to "bend the curve" on general and administrative costs with its technology investments and by ongoing unit growth outperformance. On balance, we expect to lower our near-term sales estimates, with our revised forecasts calling for 3% growth in sales and 4% growth in operating profit, down from 5% and 9%, respectively. That change is more than offset by a 70-basis-point uptick in long-term operating margin, to just north of 36%, driven by our assessment of the firm's efforts to leverage its global technology stack more efficiently across brands and markets and by management's commentary to that effect on the earnings call. Yum's R.E.D 360 cross-brand consumer insights platform is a proof point and positive step in this direction. The net effect is a low-single-digit percentage increase to our $139 fair value estimate, leaving shares trading at a slight discount.