Seeking Alpha

Yum Brands' Big, New, Growth 'Habit'

|
About: YUM! Brands, Inc. (YUM), Includes: HABT
by: J.G. Collins
Summary

Yum Brands, Inc.'s purchase of The Habit Burger Grill was announced recently.

We are thrilled at the prospect of Yum being able to build out and truly nationalize The Habit, which we believe to be a tremendously undervalued brand.

Not only does The Habit fill out Yum's missing "burger" concept but also moves the holding company into the fast-casual lane, on par with Chipotle or Shake Shack.

The Habit earns high marks from customers as a superior food concept.

We estimate Yum will outperform the sector soon after the The Habit is integrated into Yum and substantially outperform it in years to come.

New York (January 7) - We had suggested a "buy" for The Habit Burger Grill (NASDAQ:HABT), principally for long-term investors, back in September. Recently, it was announced that Yum Brands, Inc. (NYSE:YUM) had entered into a definitive agreement to acquire HABT at $14 per share, or approximately $375 million. (So much for "long term", but what a great payout from when we recommended it at $8.80 per share!) The transaction is anticipated to close by the end of the second quarter. "Yum Brands intends to fund the transaction using cash on hand and available borrowing capacity under its credit facilities, according to its Form 8K press release filings. (The definitive agreement has not been published as of this writing.)

The Habit Credit: Amin Eshaiker, pursuant to the Creative Commons License.

What It Means

While we are happy to see The Habit bought out, we are less happy to see that its current CEO, Russell Bendel, will retain his position. We hope his tenure will be short, as he does not strike us as someone who has kept pace with changes in the restaurant industry and doubt very much that he can improve the lackluster performance of the chain over which he has presided for over a decade. That said, assuming HABT shareholders approve the deal, we believe HABT having access to the Yum platform creates a significant opportunity for value creation for the brand, for the following reasons:

  • Yum is an unparalleled multi-brand restaurant franchiser;
  • Yum's stated intent to reduce Pizza Hut's "dine-in" concept and expand its delivery and carry-out ("Delco") dining concept opens up pizza restaurant leaseholds for franchisees (old or new) who might wish to swap out from a Pizza Hut dine-in pizza concept to a fast casual grill concept. (And please, NOT a "burger" grill!!! -- for reasons we detailed in our September post on The Habit. It is far too limiting relative to the HABT menu. ) A change from dine-in pizza to The Habit fast casual concept -- or a consolidation of of HABT and other YUM brands into a delco concept under a single roof --may be a better option for the hundreds of Pizza Hut dine-in restaurant franchisees the company plans to close down.
  • Yum's embrace of delivery for Pizza Hut will cause it to invest more in delivery technology apps that can be adapted to Yum's other brands, to upgrade the already serviceable HABT app, and to build relationships with a single delivery platform.

We believe the last step is essential to avoid slamming kitchens and maintaining a Lean Management pull system. Yum's "holy grail", and one it should pursue, in our opinion, would be to somehow work out the logistics to deliver orders in urban areas from all three of its restaurant chains in a single delivery, promptly and hot. This would avoid the so-called "veto vote" of group ordering, an especially important consideration for corporate accounts and family deliveries.

Summary

We think Yum is well-suited to grow HABT from a largely regional chain to a truly national chain from its corporate platform. We urge management at the holding company to adopt recommendations we made in our September "outperform" recommendation on HABT to build out the value of the smallest of its chains. There is considerable value to be grown by positioning HABT in the Chipotle (CMG) fast-casual lane with a wider "grill" menu.

We rate this new habit "Yum"

Note: Our commentaries most often tend to be event-driven. They are mostly written from a public policy, economic, or political/geopolitical perspective. Some are written from a management consulting perspective for companies that we believe to be under-performing and include strategies that we would recommend were the companies our clients. Others discuss new management strategies we believe will fail. This approach lends special value to contrarian investors to uncover potential opportunities in companies that are otherwise in a downturn. (Opinions with respect to such companies here, however, assume the company will not change). If you like our perspective, please consider following us by clicking the "Follow" link above.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The views expressed, including the outcome of future events, are the opinions of the firm and its management only as of today, January 7, 2020, and will not be revised for events after this document was submitted to Seeking Alpha editors for publication. Statements herein do not represent, and should not be considered to be, investment advice. You should not use this article for that purpose. This article includes forward looking statements as to future events that may or may not develop as the writer opines. Before making any investment decision you should consult your own investment, business, legal, tax, and financial advisers.