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Here's Why Investors Should Steer Clear of YUM! Brands

YUM! Brands, Inc. YUM has been losing the sheen of late. A look at the company’s price trend reveals that the stock has had an unimpressive run on the bourses in the past three months. Shares of this Zacks Rank #4 (Sell) company have lost 16.8% compared with the industry’s 9.7% decline. Let’s delve deeper and find out the factors hurting the company’s performance.  

Key Concerns

Despite innovations across its product line, and solid marketing and promotion initiatives, Pizza Hut sales trend has been choppy in the recent quarter. In third-quarter 2019, Pizza Hut U.S. sales and same-store sales declined 2% and 3%, respectively. Furthermore, YUM! Brands is focusing on transforming its Pizza Hut business to a modern delivery asset base in the United States. It is also restructuring as well as upgrading its franchisee base. The company believes that the choppy sales trend will persist through 2020. Moreover, the company is likely to temporarily shut down hundreds of Pizza Hut stores across the United States.

Yum! Brands’ revenues in the third quarter of 2019 decreased 3.7% year over year, following a 4% decline in the second quarter due to sales slump. The decline stemmed from its continued refranchising initiatives. Moving ahead, the company’s de-risking strategy to reduce the ownership of restaurants by expanding franchise is expected to hurt revenues and boost earnings.

Moreover, an increase in the cost of employee wages, benefits and insurance as well as other operating costs such as rent and energy costs induced significant pressure on the company’s margins.  Additionally, a competitive retail environment weighed on the restaurants’ costs. With relentless expansion strategies on track, the company is prone to face profit margin pressure.

Over the past 30 days, the Zacks Consensus Estimate for 2019 earnings has declined by 0.5% to $3.71. For 2020, the consensus mark has moved down 0.5% to $4.14.

Stocks to Consider

Better-ranked stocks worth considering in the same space include Dunkin' Brands Group, Inc. DNKN, Chipotle Mexican Grill, Inc CMG and Brinker International, Inc. EAT, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dunkin' Brands Group has an impressive long-term earnings growth rate of 10.9%.

Chipotle Mexican Grill has reported better-than-expected earnings in each of the trailing four quarters, the average being 16.1%.

Brinker International has an expected long-term earnings growth rate of 7.7%.

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