Consumer & Retail Weekly Recap #11: 9/18 Released!
Regulatory Updates $AMZN
Macro Updates $FDX
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Restaurant Stocks >>>
I have been bullish on restaurant stocks for quite some time. Seeing the below chart from Morgan Stanley gave me a nice dose of biased optimism in my thesis.
Restaurants get a bad wrap due to most failing within the first year of existence. This is largely due to entreprenuers and not large established restaurants with proven track records.
Everyone needs food. More people are dining out than ever before. Make food tasty, scalable, convenient, and affordable. Watch your stock go up, up, up.
Dominos $DPZ is probably the best example of hitting on all of the above-mentioned factors.
My current restaurant rankings are in order:
Comment your restaurant rankings below!
Yum! Brands (Ticker: $YUM) - Brief Breakdown
Company Description and Qualitative Analysis
YUM! Brands, Inc., develops, operates, and franchises four fast food chains including KFC, Taco Bell, Pizza Hut, and Habit Burger Grill. These fast food chains specialize in various food types such as chicken, pizza, burgers, sandwiches, Mexican-style food, and other food products. At the end of 2021, YUM! Brands had nearly 27k KFC stores, over 18k Pizza Hut stores, nearly 8k Taco Bell stores, and just over 300 Habit Burger in approximately 157 countries and territories. The multiple brands and some side-by-side in one store front. The variety of brands and food products with a large retail footprint gives YUM a moat on various food products. With the diverse products, YUM is almost immune to various food trends and potential FUD surrounding a single brand.
At the time of this writing (7/17/2022), $YUM is trading at $118.15 with a 52 week range of $108.37 - $139.85 and a market cap of $33.69B. In Q1 of 2022 YUM! Brands worldwide system sales grew 8% with 6% unit growth and 3% same-store sales growth. The first quarter GAAP EPS was $1.36 an increase of 27% YoY and first quarter EPS excluding Special Items was $1.05, a decrease of 1% YoY. Return of equity (ROE: Net Income / Total Equity *100) of YUM is -20.21% and net margin (net income / revenue) is 24.8%. The price to earnings (price per share / earnings per share) ratio was 21.48 and the debt to equities ratio (total liabilities / total equity) is -1.68. You can view YUM’s Q1 2022 earnings here and you can download their 2021 Annual Report here.
Here are three points to support the bullish thesis:
- Restaurant Sales Increasing: According to Yahoo! Finance, restaurant sales increased by 0.7% in May while other spending such as retail has slowed. This is positive for the entire fast food sector but Yum! Brands are expected to grow 4.3% over the entire year and a 0.4% earnings growth over April and May lead to positive signs ahead for Yum!. More people flocking to restaurants means more will flock to fast food and Yums! Retail footprint gives it a leg up on most other fast food brands.
- Retail Footprint: As the world is more open and housing is increasing within cities, more people will be in the vicinity of a Yum! Brands store. Whether people get this food delivered, through the drive through, or sit in a store, having 50k retail stores is extremely beneficial when people are moving away from the city into the suburbs and smaller towns which have many of these locations.
- Menu Simplification: As many places are starting to take items off of the menu to “simplify” the menu, the Yum! Brands stores do not have that issue. The Yum! Brands play the hits. The menu has not changed for many of these brands with a few exceptions of small testing and additions when things are going well. People are creators of habit and the main items in the Yum! Brands menus have not changed in a very long time. The comfortability people face and the name brand of these fast food places will prove to be a benefit going forward.
Here are three points to support the bearish thesis:
- Decrease in EPS: Although earnings have seemed to be positive, the earnings per share has decreased. This may seem like a trend in most companies as capital becomes difficult to get and a recession looming. A recession would mean that consumers spend less, although shown above that more consumers are spending at restaurants that may not translate to fast food. My thesis is that it will, but it is also a risk that fast food will not be a part of the beneficiaries of this movement. This decrease in EPS is worrisome but not the end of the world.
- Health Trend: This is a growing worry for all fast food brands as a whole. People are beginning to take control of their health and understand what is going into their bodies. This is positive for humanity but negative for fast food brands as it costs more to provide healthier and more fresh foods. Many fast food brands have moved towards the healthy trend but it is hard to escape things like fried chicken when the name of one of the chains is Kentucky Fried Chicken. It will be difficult to become healthy based on the reputation of the Yum! Brands, but I could be wrong on this front and people could continue to eat unhealthy in order to eat for less money.
- Involvement in Politics: YUM! Brands are now pulling their stores out of Russia which some may see as a positive for publicity, but lowering the retail footprint in an inflationary time globally does not seem fiscally smart in my opinion. There is obviously geopolitical risk with maintaining these store fronts in Russia, but limiting the amount of stores in a country will limit revenue in a very inflationary time. My thesis on the fast food industry is that it will grow during an inflationary time because people will find ways to cut expenses, but if there are not the YUM! Brand options consumers will just find another alternative. Consumers will also not eat at a fast food place based on their political stance. We’ve seen it with Chick-fil-A. No matter what these places say, if it is convenient and good, people will come.
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Stock Breakdown: Fast Food Overview
The previous CPI print was 8.6% year over year for the month of May and it seems like it is not slowing down. Supply chain issues,increased fuel costs persist, housing market booming, food prices increases, and much more. The FED did raise interest 75 basis points which was the largest increase in 28 years, in an attempt to combat inflation. But as outlined above, is this strictly inflation caused by monetary policy? Of course monetary policy plays a major role, but without the shutdowns that have caused massive amounts of supply chain disruptions would inflation be what it is today? I do not believe so. With an impending conflict between China and Taiwan it seems like supply chain issues may persist.
Sector Description: What is the Cyber Security Industry?
The fast food industry is an industry that has seemingly defined America for quite some time. Interestingly enough, although the reputation of fast food is unhealthy for consumers, the push for fast food to offer healthy options has continued to increase demand and revenue (see the revenue growth below). As I thought that the COVID dip in revenue would be difficult to rebound for fast food companies, I believe that in an inflationary time fast food may be appealing for consumers as it is generally cheaper than the average restaurant.
Large Public Companies in the Sector
McDonald’s (Ticker: $MCD) - Market Cap: $183.3B
Chipotle Mexican Grill (Ticker: $CMG) - Market Cap: $37.2B
Yum! Brands (Ticker: $YUM) - Market Cap: $32.6B
Opportunities for Broad Exposure
An opportunity to get broad exposure to the fast food industry is the AdvisorShares EATZ ETF. You can learn more about this ETF here.
Key Metrics and Considerations
Increasing Sales excluding 2020: Overall, the fast food industry saw a hit in 2020 due to lockdowns and shut downs. Excluding 2020, the industry has seen growth every single year and I’d look for individual companies to track or even be ahead of growth of the overall sector. Sales and revenue are a key metric that I’ll be looking at to see if that growth is continued and analyze to see if I believe the growth is sustainable.
Embracing Healthy Trend: Although fast food became established over being quick and the healthiness of the food was on the back burner, the trend is starting to shift in the other direction. More people are aware of what they are putting into their bodies and how food can affect them. I believe this trend will continue and although there will most likely be a spot for unhealthy fast food, the healthy options will bring in more customers.
Delivery Increase: Delivery service has increased dramatically since the shut downs were implemented and there has been a slight pullback on the amount of deliveries but the expected convenience is still there. Fast food does not make a significant profit in delivery but the access to more customers is crucial. I look for this sector of the fast food company’s business to be growing.
Opinion of Sector
I am bullish on the sector as somewhat of an inflation hedge of sorts in the short term. I believe that consumers will find ways to cut costs and instead of eating out at an expensive restaurant consumers may flock towards cheaper options. With inflation and the massive amounts of brick and mortar fast food businesses in heavy traffic areas, I can see fast food increasing in sales as long as inflation is high.
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Where is the source of that fast food revenue data chart from?
McDonald's makes over $20B in the US each year alone?
Monday Madness - 5/9/22
Overall, 9 stock positions increased/added.
Additional investments into my Stash portfolio (4).
$BMBL - $35.66 consensus price target. DCA down from previous buys.
$CMPS - $73.00 consensus price target. DCA down from previous buys.
$SFIX - $12.20 consensus price target. DCA down from previous buys.
$YUM - $135.95 consensus price target. DCA down from previous buys.
None of the above, with the exception of $YUM, are core positions, I'm banking on the differential in the current share price vs the anticipated upside. Willing to hold, but will take profit when it presents itself.
Additional investments into my M1 Finance "Fat Cat Investing" portfolio (5)
Anyone familiar with M1 Finance knows how the 'pies' work, but for those that don't, once the pie is setup and weighted you have very little control, aside from adjusting percentages, in controlling individual buys. Since I added $CUBE to the "Fat Cat Investing" portfolio today, I deposited an off-schedule deposit to force a 'buy' resulting in the purchases above, as dictated by my weighting. The addition of $CUBE brings this portfolio up to 49 holdings.
The 'Fat Cat Investing' portfolio was down 3.05% overall today and is a part of my ongoing "Real Estate Rumble".
These are now "core" positions in this IRA, so unless there is a fundamental change in one of the REITS - all 49 are long term holds.
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