YUM CHINA Black Book
YUMC is a LONG
Yum China (YUMC) Long Thesis:
- Hedgeye Macro – China In Quad 2: In the Hedgeye Quad framework, China is in #Quad2, which is bullish for stocks like YUMC. With this as a macro framework and our in-house expert on China, Felix Wang believes China is on the road to recovery. YUMC has been hit hard since the beginning of COVID, but a positive macro backdrop with the pandemic hopefully coming to an end gives us a great entry point and is bullish for YUMC financials.
- KFC and Technology Drive Growth: KFC is a powerhouse brand globally and dominant in China. KFC appeals to Chinese consumers by adapting its menu to local tastes and has a robust new product pipeline. At the end of 1Q22, KFC had over 8,100 outlets across 1,600 Chinese cities. The power of the brands has attracted over 345 million members. Members accounted for over 60% of sales, with digital representing 88% of sales. The YUMC digital platform is one of the best in the world and is an essential platform for incremental growth.
- Pre-Announced Horrible 2Q22 Results – Will it be the last? The Omicron variant caused significant volatility in the company's business operations in 1Q22. In March 2022, over 1,700 of their stores were temporarily closed or offered only takeaway and/or delivery services. Same-store sales in March decreased by more than 20%, and as a result, the company incurred an operating loss in March. The financials of YUMC have been devastated over the past few years. However, they will still generate over $1.4B in EBITDA in 2022, with 2023 indicating signs of growth and a return to more robust levels of profitability.
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Starbucks Likely to Tap Board Director to Fill Top Job
SBUX is a SHORT
Former Domino's and Ulta Beauty chiefs are likely candidates from Bloomberg.
Rich Allison (former DPZ CEO) and Mary Dillion (former ULTA CEO) are two strong candidates, but my money is on Mary Dillion.
Unionization hits CMG
CMG is a SHORT
Employees of a Chipotle Mexican Grill in Augusta, Maine, have asked federal labor regulators for the go-ahead to vote on unionizing their store. If one store is feeling understaffed, there are probably more. This is not the first time we have heard about CMG stores being understaffed (a comprehensive industry problem); now, employees are doing something about it. If this trend continues like SBUX, CMG will need to invest more in labor costs to slow the movement.
If an election is scheduled and most workers opt to organize, the store would be Chipotle's first union store. While similar to SBUX, there are some differences. Like Starbucks, the Chipotle workers sent a group letter to senior management, expressing dissatisfaction. But unlike SBUX, the Chipotle employees cited specific gripes about working conditions, including understaffing and insufficient training. Starbucks workers said their motivation is they did not have a direct say in the coffee chain's strategic direction. Starbucks Workers United has accused management of blatantly trying to thwart employees' desire to unionize, violating federal rules. On Tuesday, a regional NLRB director asked a federal court to stop Starbucks from using what the official said were illegal anti-union tactics. Chipotle's situation also differs from Starbucks in that employees of Chipotle have emphasized their intention to form a union unaffiliated with any larger labor group. From the beginning, Starbucks employees sought help in organizing from Workers United, a union affiliated with Service Employees International Union (SEIU), the nation's second-largest labor organization. According to Restaurant Business, the Augusta Chipotle store employees turned the Maine operation of the AFL-CIO, but only because that labor group was a neighbor. "They had reached out to us earlier for information about how to file the paperwork, but that's the extent of our involvement," he told Restaurant Business.
Chipotle responded immediately - "We immediately deployed additional resources such as hiring and training additional staff, retraining existing employees, and providing new leadership at the restaurant. We think our actions in addressing the concerns raised by our crew in Augusta just last week before receiving notice of any petition in that location show how quickly we can and do respond to our employees when they directly notify us of their issues and concerns."
