Yum Earnings: Digital Strength and Value Orientation Should Defend Results Despite Tough Backdrop

Wide-moat Yum Brands YUM reported third-quarter earnings roughly in line with our forecasts, and we came away encouraged by the firm’s positioning against a tough restaurant industry backdrop. With nothing emerging from the report that changes our long-term expectations for mid-single-digit annual growth in sales, high-single-digit annual growth in operating profit, and low-double-digit growth in diluted EPS, we expect little change to our $139 fair value estimate and continue to view shares as attractive. We’re also lowering our Uncertainty Rating to Low from Medium for the name, consistent with our quantitative methodology.

Yum posted $1.71 billion in sales and $1.44 in adjusted earnings per share, slightly missing our $1.77 billion top-line estimate but comfortably clearing our $1.27 EPS forecast. Consistent with recent quarters, momentum was driven by KFC International and Taco Bell U.S., which together posted 13% system sales growth. We noticed a few chinks in the armor—KFC U.S. and Pizza Hut U.S. saw roughly flat comparable store sales (0% and 1%, respectively)—but remain broadly encouraged by the operator’s ability to defend top-line momentum despite declining traffic industrywide, particularly in the United States. To this effect, Taco Bell U.S. purportedly saw 2%-3% increases in guest traffic across income cohorts, which augurs well for 2024, a year in which we expect negative restaurant traffic in the U.S. as consumers continue to rationalize discretionary spending.

Finally, the firm’s digital investments continue to bear fruit, with its unified global commerce platform setting it up to derive global benefits from its access to cross-brand consumer data. The company saw 45% of sales come through digital channels during the quarter, and with an emphasis on increasing global kiosk penetration and rolling out loyalty programs, we expect it to start to benefit from personalization, improved pricing, and better inventory management through its “AIM” software.