Banh Shop Won’t Add Much Spice to YUM Stock

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Forget breakfast tacos, Yum Brands (YUM) has found the next big thing — banh mi.

YUM stock yum brandsThe company just opened its first Banh Shop in Dallas, looking to grab a piece of the growing banh mi market. The question is whether Banh Shop can do anything to light a fire under YUM stock, which is down 8.5% in the past three months.

Christophe Poirier, VP of Yum’s emerging brands division believes banh mi is the next “big trend,” and Dallas is the perfect location to start the building process. Rival Chipotle Mexican Grill (CMG) has been slowly rolling out ShopHouse, its own Southeast Asian-influenced concept over the past three years. With a total of 10 locations open or under construction, CMG’s ShopHouse has a good head start on Yum Brands, which doesn’t do any favors for YUM stock.

Developing new restaurant concepts can be a lot like throwing paint against a wall: You’re just hoping something sticks. Yum’s got other ideas in the hopper, including Super Chix, a one-off test store in Arlington, Virginia, that focuses on chicken, bringing a higher-quality menu to the party. Its other concept, U.S. Taco Co., is an upmarket version of Taco Bell that’s got its sights set squarely on Chipotle. Unfortunately, it’s rare that test concepts from gigantic, restaurant conglomerates go anywhere. These two likely aren’t going to help YUM stock.

What YUM Stock Can Expect From Banh Shop

Well …. nothing at the moment. It’s one store in Dallas focusing on Vietnamese food, with a second opening in October at the Dallas/Fort Worth International Airport. Though YUM is hardly a juggernaut in the space, the trend is definitely its friend. Long-time restaurant journalist Robin Lee Allen states, “The data all show this is what young customers want — customizable ethnic cuisine.” The question is whether Banh Shop can generate enough scale to make its current efforts worthwhile to YUM stock.

Seeking Alpha contributor Vincent Carson took a look in 2013 at the potential contribution of ShopHouse to Chipotle’s overall business. I take these financial projections with a grain of salt, but it’s an interesting examination nonetheless. He found that in the best-case scenario, ShopHouse might generate as much as 22% of Chipotle’s total overall revenue by the year 2022. But in the short term, none of this does anything for CMG stock: Carson estimated ShopHouse would add less than 5% to its intrinsic value.

The same holds true for YUM stock.

Last year, the average KFC, Pizza Hut and Taco Bell store generated $942,000, $861,000, and $1.4 million respectively. The CMG best-case scenario envisions ShopHouse growing from one location to 1,013 in the span of a decade, with most of the growth in 2019 and beyond. Assuming the same thing for Yum Brands, Banh Shop would open 1,000 shops over the next 10 years generating average sales per store similar to Taco Bell, and contributing $1.4 billion in additional revenue by the year 2022.

While it’s not chump change, it’s still only about 10% of Yum Brands’ current overall revenue, which doesn’t take into consideration any of the revenue growth the company can expect in emerging markets like China, which is responsible for more than half of YUM’s total revenue.

For the next few years, owners of YUM stock should concern themselves with just two issues: China and the U.S. If it can fix its supplier issues in China while also jumpstarting its U.S. comps, there’s definitely a lot of upside to YUM stock.

The former issue is definitely fixable. The latter has been a thorn in the company’s side for some time and it’s questionable whether breakfast, banh mi or anything else can to do the trick.

Banh Shop is a nice story, but it has very little to do with YUM stock.

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As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/yum-stock-banh-shop-catalyst/.

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