Yum Earnings: Solid Quarter Powered by Digital Sales, Value Positioning, and China Recovery

Wide-moat Yum Brands YUM posted solid second-quarter earnings per share of $1.41, surpassing our $1.24 forecast despite missing our top-line estimate, with unit development remaining strong. The firm benefited from broad-based comparable-store sales growth of 9% globally. This in tandem with disinflationary food costs helped drive momentum in restaurant-level margin, a key driver of store-level economics and, by extension, the firm’s long-term unit development target of 5% annual growth. We’re encouraged by a turnaround in China; Yum’s largest franchisee there opened 422 gross stores, or 41% of Yum’s 1,025 gross openings in the quarter. We plan to raise our $133 fair value estimate by about 4%-5% to reflect outsize unit growth and the time value of money. This will leave the shares trading in a range that we consider fairly priced.

Momentum remained strong across brands, with same-restaurant sales growth of 13% for KFC, 4% for Taco Bell, and 4% for Pizza Hut. All benefited from a strong digital mix, with digital sales growing 30% globally and now representing 45% of total systemwide sales. This is top among our quick-service restaurant coverage. We believe that digital platforms provide customers with better access to brands and drive incremental traffic, positioning the largest global players with robust digital platforms well for market share gains at the expense of smaller competitors. Further, strong value platforms across banners and the launch of compelling value platforms like Pizza Hut’s melts and KFC’s hand-breaded chicken nuggets continue to drive incremental traffic, propping up results.

We expect 6.4% cumulative annual sales growth, 8.4% growth in operating profit, and low-teens growth in adjusted EPS between 2023 and 2027, suggesting that Yum’s portfolio continues to fire on all cylinders and management’s long-term growth algorithm is attainable.