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What Partnership With GrubHub Means for Yum

The deal should offer KFC and Taco Bell a quick way to add incremental transaction growth as well as unique data on the broader restaurant delivery landscape.

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Yum Brands Inc
(YUM)

Although

The highlight of the quarter is Yum's partnership with GrubHub, which will allow for online ordering for pickup and delivery at KFC and Taco Bell locations in the U.S. In addition, Yum will purchase $200 million of GrubHub's common stock, with Pizza Hut U.S. president Artie Starrs also joining the GrubHub board. We believe this plays into increasing demand for delivery across a wider range of food options, while offering KFC and Taco Bell a quick way to add incremental transaction growth (similar to the increasing transaction growth McDonald's is seeing with its UberEats partnership) as well as unique data on the broader restaurant delivery landscape.

That said, the announcement should not overshadow solid fourth-quarter fundamentals, including positive comps at each brand (3% KFC, 2% Taco Bell, and 1% Pizza Hut) and core operating profit growth excluding refranchising activity and Pizza Hut U.S. transformation investments. Yum has laid out reasonable guidance for 2018, including 2-3% comps, 3%-4% unit growth (a slight acceleration from 2017), and 5%-6% system sales growth. While reported core operating profit is expected to be flat, there will be a 6-7 point hit for G&A timing tied to refranchising activity and 2-3 points due to franchisee fees revenue recognition changes. This will not alter our medium-term core operating profit growth (high-single digits) or total shareholder return outlooks (15%-plus with plans to return tax reform savings to shareholders). We're planning a modest increase to our $82 fair value based on time value of money and a lower effective tax rate, and believe current market volatility could create a buying opportunity.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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