Stifel upgrades YUM, QSR to ‘buy’, thinks fast food will remain better-positioned after reopening

Stifel analysts upgraded Yum! Brands and Restaurant Brands International to Buy from Hold, which reflect their “increased appetite for investing in fast food companies with durable business models.” Furthermore, the analysts think fast food restaurants will remain better-positioned after reopening post-COVID.

Video Transcript

MYLES UDLAND: Let's move on now and talk about our call of the day. And today, we are looking at Stifel's latest commentary in the restaurant space, another area of expertise for you, Heidi. And the company coming out and upgrading or the firm coming out and upgrading shares of both Yum! and QSR. That is the parent company of Burger King, Popeyes, and Tim Hortons.

And I think it's interesting here the way that Wall Street continues to look-- and I guess they have to. It's the only guide post they really have. --but continues to look at China as a potential outline for how things can progress here in the US. And the Yum! call is really just about what they are seeing happen in China, and it relates also to the news we got last night from Nike, where most of their stores, 100% of the company owned stores in South Korea and China are open now. And it seems like, again, the numbers are terrible, but the rate of change continues to look a little bit better at least when you look towards what's happening in the Asian markets, where COVID-19 came quite a bit earlier than we've seen here.

HEIDI CHUNG: And Myles, when we talked about this back in February when we were still in the studios, we saw the damage being done to Yum! in China at that time. And I looked back at data to see really help earnings were post SARS in China when it comes to Yum! Brands, and the recovery was pretty swift. So at the time, that was a real indication of what a recovery would sort of look like for companies, like Yum! and Restaurant Brands.

But I think this call that Stifel makes, makes a lot of sense. Of course, it comes right after we've heard from a lot of these companies and their management saying that they're starting to see sales improve very meaningfully towards the end of April and the beginning of May. So of course, the call is sort of playing catch up, if you will.

But that being said, when you take a look at Yum!, and when you take a look at Restaurant Brands, or when you just take a look at the fast food industry as a whole, these companies largely relied on delivery as well as drive-through, even before this pandemic happened, right? So when we're taking a look at winners and losers within the restaurant industry, it's a clear matter of fact situation that fast food restaurants would probably weather this storm better than, say, full service restaurants, like BJs, Cheesecake Factory, a lot of these different chains that rely on the in restaurant dining experience. So those companies are probably going to have a much harder time emerging from this pandemic without seeing a big, big hit to business, and they have to start thinking about how their business is going to evolve after this pandemic as well.

That being said, we also talk a lot about how mom and pop restaurants are also probably going to not [INAUDIBLE] out of this unscathed either. But that being said, fast food, Taco Bell, for instance, the bright spot within Yum! Brands. And then when you look at Restaurant Brands, you have Popeye's leading the way there. So both brands here have winners and losers, even within their own portfolios. But the Stifel column makes a lot of sense to me.

DAN ROBERTS: Well, and as Heidi alludes to, you guys, I mean, this Stifel note mentions fast food restaurants were built for off premise usage. So by some regards, you would think, of course, this time would at least not be as damaging to fast food restaurants. Maybe it doesn't necessarily benefit them, but at the same time-- and maybe it's a reminder that there's kind of two worlds here and two legions or types of people, the way people are riding out this pandemic.

But at the same time, I feel like anecdotally, we've had a lot of people on our shows. And we've talked amongst ourselves about not really going out of the house at all, even just for fast food pickup. And maybe not doing takeout very often, but in fact, doing home cooking more.

We have Blue Apron coming on saying, you know, once we see the numbers from, I believe, it was April, we expect those numbers to be good. Because a lot where people are cooking at home, so I guess both could be true. But it's just kind of interesting to think that fast food restaurants are seeing a boost from this time since people already take out from fast food restaurants anyway. But a lot of people aren't going to restaurants period and aren't getting take out. They're cooking meals themselves.

HEIDI CHUNG: But I think, Dan, to your point, though, I don't necessarily think we're seeing a boost in sales for fast food restaurants. I just think that things are staying steady. When we talk about Blue Apron, when we talk about cooking at home, buying groceries, just like the retail sales showed in April, it didn't actually see a lot of sales in grocery stores. We saw a decline of 13% or so. So a lot of that stockpiling is over.

A lot of that novelty of being able to cook at home with your family is sort of over as well. So it's really looking to the future, looking at May, and looking at June, and see how the consumer habits change then. That will be much more indicative of how the restaurant industry fares through all this, how the US consumer fares through all of this. I think just indicative of everything when it comes to the US economy.

MELODY HAHM: And Heidi, I think the Stifel note really pointed to interesting survey findings, right? 26% of heavy sit down restaurant users plan to actually decrease dining room usage. Of course, 18% do plan to increase it, because they probably feel deprived during this time and want to actually be able to eat out at a restaurant. And this begs the question of how sticky is our behavior right now, right?

I mean, you did a really amazing piece of doing that Chick-fil-A home kit meal thing. But if it weren't a quarantine, would you be doing that right now? Or if you have a little bit of discretionary income, would you be going to a restaurant?

And I think Jonathan Mays, the Editor in Chief of Restaurant Business Magazine, had a really interesting tweet yesterday saying that fast food restaurant executives are congratulating themselves right now. But three things are actually driving that sales growth, stimulus checks, lower supply, and shutdowns that make people want to leave the house to some capacity. So we wonder how long those trends can actually last.

HEIDI CHUNG: Yeah, Melody. I mean, those are really great points. And like I mentioned earlier as well, it's just the future of the different kinds of Restaurant Brands and companies, right? So the full service restaurants, again, probably going to be struggling. And if you take a look at full service restaurants, too, they're largely located in the suburbs, right?

Whereas fast food restaurants are not located in the suburbs, but they're also located in dense urban areas as well. So it's all about accessibility at this point. One, fast food restaurants are staying open across the board [INAUDIBLE]. Two, they're offering delivery. And if you don't want to get delivery, you can also go and pick it up. Or you can just go through the drive-thru as well, so it's all about making things accessible for the consumer as easy and frictionless as possible.

And like we heard from Chipotle, they're still doubling down on the fact that they want to open up more stores that have Chipotlanes in it just to sort of meet consumers halfway. So it's all about strategy going forward from here, and I know a lot of people talk about the new normal. But that's the situation that restaurants are going to have to adapt to going forward.

MYLES UDLAND: And we got through the whole note, Heidi, without mentioning that Stifel calls out Taco Bell as best in class domestically, which--

HEIDI CHUNG: I mean, wasn't that a given, Myles?

MYLES UDLAND: A call near and dear to your heart. Stifel likes Taco Bell. Second only to McDonald's in terms of comfort trade that people are seeing around the country during this shelter at home period. All right, Heidi Chung, thanks so much for joining us.