Yum! Brands (YUM)

Fast-food company Yum! Brands (NYSE:YUM) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 11.8% year on year to $1.79 billion. Its non-GAAP profit of $1.30 per share was 1.4% above analysts’ consensus estimates.

Company Overview

Spun off as an independent company from PepsiCo, Yum! Brands (NYSE:YUM) is a multinational corporation that owns KFC, Pizza Hut, Taco Bell, and The Habit Burger Grill.

Traditional fast-food restaurants are renowned for their speed and convenience, boasting menus filled with familiar and budget-friendly items. Their reputations for on-the-go consumption make them favored destinations for individuals and families needing a quick meal. This class of restaurants, however, is fighting the perception that their meals are unhealthy and made with inferior ingredients, a battle that's especially relevant today given the consumers increasing focus on health and wellness.

Yum! Brands’ competitors include include Burger King and Popeyes (owned by Restaurant Brands, NYSE:QSR), Domino’s (NYSE:DPZ), McDonald’s (NYSE:MCD), and Wendy’s (NASDAQ:WEN).

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $7.74 billion in revenue over the past 12 months, Yum! Brands is larger than most restaurant chains and benefits from economies of scale, enabling it to gain more leverage on its fixed costs than smaller competitors. Its size also gives it negotiating leverage with suppliers, allowing it to source its ingredients at a lower cost. However, its scale is a double-edged sword because there are only a finite of number places to build restaurants, making it harder to find incremental growth. To expand meaningfully, Yum! Brands likely needs to tweak its prices, start new chains, or enter new markets.

As you can see below, Yum! Brands’s sales grew at a tepid 5.6% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it barely increased sales at existing, established dining locations.

This quarter, Yum! Brands’s revenue grew by 11.8% year on year to $1.79 billion but fell short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 6.4% over the next 12 months, similar to its six-year rate. This projection is underwhelming and suggests its newer menu offerings will not catalyze better top-line performance yet. At least the company is tracking well in other measures of financial health.

Number of Restaurants

Yum! Brands sported 60,507 locations in the latest quarter. Over the last two years, it has opened new restaurants at a rapid clip by averaging 5.1% annual growth, among the fastest in the restaurant sector. Additionally, one dynamic making expansion more seamless is the company’s franchise model, where franchisees are primarily responsible for opening new restaurants while Yum! Brands provides support.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.

Same-Store Sales

The change in a company's restaurant base only tells one side of the story. The other is the performance of its existing locations, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales is an industry measure of whether revenue is growing at those existing restaurants and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Yum! Brands’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1.8% per year. This performance suggests it should consider improving its foot traffic and efficiency before expanding its restaurant base.

In the latest quarter, Yum! Brands’s same-store sales rose 3% year on year. This growth was an acceleration from its historical levels, which is always an encouraging sign.

Yum! Brands has best-in-class unit economics for a restaurant company, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 48.1% gross margin over the last two years. Said differently, roughly $48.11 was left to spend on selling, marketing, and general administrative overhead for every $100 in revenue.

Yum! Brands produced a 46.8% gross profit margin in Q1, marking a 3.2 percentage point decrease from 50.1% in the same quarter last year. Yum! Brands’s full-year margin has also been trending down over the past 12 months, decreasing by 2.8 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as ingredients and transportation expenses).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Yum! Brands has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition. The company’s free cash flow margin was among the best in the restaurant sector, averaging 18.9% over the last two years.

Taking a step back, we can see that Yum! Brands’s margin was unchanged over the last year, showing it recently had a stable free cash flow profile.

Yum! Brands’s free cash flow clocked in at $333 million in Q1, equivalent to a 18.6% margin. The company’s cash profitability regressed as it was 1 percentage points lower than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Yum! Brands’s five-year average ROIC was 70.5%, placing it among the best restaurant companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

Yum! Brands reported $607 million of cash and $11.36 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.73 billion of EBITDA over the last 12 months, we view Yum! Brands’s 3.9× net-debt-to-EBITDA ratio as safe. We also see its $490 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Yum! Brands slightly beat analysts’ same-store sales and EPS expectations this quarter. On the other hand, its revenue missed. Overall, this was a mixed quarter. The stock traded down 1.4% to $145.45 immediately following the results.

Updated: July 9, 2025 at 10:47 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Yum! Brands.

In our opinion, Yum! Brands is a good company. Although its revenue growth was a little slower over the last six years, its new restaurant openings have increased its brand equity. And while its projected EPS for the next year is lacking, its impressive operating margins show it has a highly efficient business model.

Yum! Brands’s P/E ratio based on the next 12 months is 24.5x. When scanning the restaurant space, Yum! Brands trades at a fair valuation. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $159.31 on the company (compared to the current share price of $150.85), implying they see 5.6% upside in buying Yum! Brands in the short term.