Digital Transformation And New Concepts Will Improve Customer Experiences At Taco Bell And KFC

Key Takeaways

• Integration of technology teams and launch of Byte by Yum! aim to boost revenue through improved operations and digital customer engagement.
  
• Growth in Taco Bell and KFC sales, alongside new concepts, indicates potential for strong revenue and profit growth across Yum! Brands.
  
• Geopolitical disruptions, increased competition, and rising costs pose significant risks to Yum! Brands' revenue growth, market share, and operating expenses.

Catalysts

Develops, operates, and franchises quick service restaurants worldwide.

• Yum! Brands is accelerating its technology transformation with the integration of digital and technology teams and the launch of Byte by Yum!, a comprehensive SaaS product suite expected to streamline operations, improve customer experiences, and enhance digital sales, potentially boosting revenue.
  
• Digital sales grew by 15% in 2024, and with continued rollout and adoption of Byte platforms, Yum! Brands is poised for further revenue growth as digital engagement and loyalty membership, which increases visit frequency, expand.
  
• The growth engines of Taco Bell U.S. and KFC International have shown strong system sales and operating profit growth, indicating potential for continued revenue and profit growth, particularly as KFC expands market penetration and Taco Bell leverages product innovation.
  
• Operational efficiencies, such as successful labor productivity initiatives at Habit Burger & Grill, have improved profitability margins, demonstrating potential for increased net margins across Yum! Brands.
  
• Yum! Brands plans to expand new test concepts like Saucy by KFC and Live Más Cafe, which are aimed at capturing evolving consumer preferences and could drive incremental sales and enhance brand relevance, impacting future revenue growth.

Yum! Brands Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Yum! Brands's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.7% today to 21.7% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $7.38) by about March 2028, up from $1.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.8x on those 2028 earnings, down from 30.5x today. This future PE is greater than the current PE for the US Hospitality industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 0.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.34%, as per the Simply Wall St company report.

Yum! Brands Future Earnings Per Share Growth

Risks

• Yum! Brands' system sales growth was affected by global consumer sentiment and sales headwinds in markets affected by the Middle East conflict, which could continue to impact revenue negatively.
  
• Same-store sales for KFC were flat year-over-year due to geopolitical disruptions and market-specific challenges, which might pose risks to top-line revenue growth.
  
• Despite strong digital sales performance, there is always a risk of technology adoption slowing down, which could hinder the anticipated boost to revenue and earnings.
  
• Increased competition and promotional pressures in the pizza category affected Pizza Hut, potentially impacting its market share and overall contribution to divisional operating profit.
  
• Changes in tax rates and costs associated with new technology investments could lead to unforeseen increases in operating expenses, affecting net margins and earnings.

Valuation

• The analysts have a consensus price target of $153.621 for Yum! Brands based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $185.0, and the most bearish reporting a price target of just $138.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.1 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $162.53, the analyst price target of $153.62 is 5.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.