Yum Brands Expanding in the Wrong Country

YUM stock should refocus on its core emerging markets

   

Yum Brands (YUM), the parent company of KFC, Pizza Hut and Taco Bell, is on the offensive: Its Taco Bell chain will be adding 2,000 new domestic locations in the next 10 years.

yum Yum Brands Expanding in the Wrong CountryTo put that in perspective, there are currently about 6,000 Taco Bell restaurants scattered across America. This means that the chain will be increasing its presence by fully one-third in a country that already has no shortage of fast-food taco joints.

Most of these new units will be franchises (as opposed to company-owned), and Yum Brands is specifically targeting women and minority franchisees in an effort to attract “new blood.”

I’ve been known to frequent Taco Bell a little more often than my doctor might like; it seems I have a weakness for tacos that sell for less than a dollar. But my own (admittedly awful) dining preferences aside, Yum’s massive domestic expansion raises a few questions.

I’m a big fan of the franchise restaurant model as opposed to the company-owned restaurant model. It turns a gritty, hypercompetitive and low-margin business into a higher-margin brand-management company.

But strong brands don’t need to go out looking for franchisees; they normally have would-be franchisees knocking on their doors. Yum brands’ aggressive recruiting efforts may be creating major headaches for YUM stock down the line if some of these inexperienced new franchisees find themselves in over their heads.

But more fundamentally, why the sudden domestic push? Yum Brands jumped into emerging markets with both feet decades ago, primarily through expansion of KFC, and emerging markets have long been the company’s primary engine of growth. In fact, I would go so far as to say that Yum is first and foremost an emerging-market company. YUM stock gets 60% of its revenues from emerging markets and has more than 13,000 emerging market locations — nearly double that of McDonald’s (MCD).

The sudden emphasis on the American market raises questions about management focus. Sure, China’s growth is slowing, and 2013 has been a rough year for emerging markets in general. But refocusing on the American market seems like a major distraction in what has otherwise been a remarkably successful expansion strategy.

Furthermore, its Taco Bell restaurants have major competition from Chipotle Mexican Grill (CMG) and its imitators, and that’s a battle the company will have a hard time winning. Chipotle is wildly popular among younger and more health-conscious Americans for its use of organic ingredients.

Taco Bell has responded by taking its menu upmarket and in a healthier direction. For example, its Fresco Menu and Cantina Bell Menu are both massive steps up from its traditional low-budget options.

It’s tempting to dismiss this as putting lipstick on a pig, but the quality of Taco Bell’s food really has improved in recent years. Whether it has improved enough to realistically compete with Chipotle is another story, however.

So, what about YUM stock? Is it a short?

No — or at least, not yet. YUM stock trades at 21 times expected 2014 earnings, which is a little on the expensive side. But at 2.6 times sales, the company is considerably cheaper than MCD stock (3.43 times sales), CMG stock (5.27 times sales) or Burger King stock (BKW) (5.82 times sales).

And as I mentioned before, Yum Brands’ strong presence in China and other emerging markets is a major plus.

So, I’m not shorting YUM stock any time soon. But I’m not buying it either — not until I see management refocus its efforts where they are likely to bear the most fruit.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.


Article printed from InvestorPlace Media, http://investorplace.com/2013/12/yum-stock-yum-brands-wrong-direction/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.