Here’s a company that took me (and analysts) by surprise with its quarterly results. Yum! Brands, Inc. (NYSE:YUM), the owner of Pizza Hut, KFC, and Taco Bell managed to report better than expected results despite recent complications in China. Does that mean the worst is over?
Read on to find out more.
Number crunching
Yum!’s total system sales increased 1% from last year. Net income, however, went down 27% to $337 million. A major portion of the decline was attributable to currency rate changes in the last three months. Total revenue went down 8% to $2.53 billion. Earnings per share were down 24% to $0.72.
Yum! Restaurants International’s (YRI) system sales increased 4% year on year. Same-store sales for YRI went up 1%. Operating profit increased an impressive 19% to $199 million for the quarter.
The company added 380 new restaurants to its network in the quarter, most of them in the emerging nations.
The Chinese story
Yum!’s major concern in the previous quarter was China. Yum! Brands, Inc. (NYSE:YUM) derives a huge portion of its revenue from China. In fact, KFC, owned by Yum!, is considered to have revolutionized western culture in China, with over 4,500 stores across the country. China is among the few places in the world where the fast food domain is dominated by KFC and not McDonald’s Corporation (NYSE:MCD).
In 2012, KFC ran into troubled waters in China when it got involved in a case involving the use of questionable chicken in its offerings. Later, KFC got entangled in an avian flu scare in China, leading to a significant fall in its sales. Not surprisingly, Yum! is still reeling from the low demand for its food in China.
In its last quarter, revenue from China was down 5% to $1.15 billion. Same-store sales were down 20%, while system sales declined 9%. Operating profits from Yum! Brands, Inc. (NYSE:YUM)’s Chinese business was down a massive 40% from the previous year to $154 million in the last quarter.
What now?
Yum! has been taking necessary steps to curtail the losses from KFC’s fall in sales and its negative publicity in the Chinese media. The company is looking into its supply-chain logistics as well as developing a quality assurance plan to avoid such mishaps in the future.
David Novak, Chairman and CEO of Yum!, is optimistic about the company’s future and believes that the worst is over. With plans of opening over 700 new restaurants in China in 2013, he expects a full recovery in Yum!’s sales in the country.
Other fast food chains have also been affected by Yum! Brands, Inc. (NYSE:YUM)’s involvements in China. McDonald’s Corporation (NYSE:MCD), which operates around 1,700 stores in China, has also suffered from a decline in sales in the region, as reported in its last quarter earnings. McDonald’s same-store sales declined around 4.5% in the quarter. Investigations made into KFC’s supply of chicken and the media hype surrounding it led to a general fall in consumer demand for chicken products, thereby affecting McDonald’s revenue from China. Overall, McDonald’s Corporation (NYSE:MCD) global sales were down 1% in the previous quarter.
Bell the cat?
One of the highlights in Yum!’s quarterly results was the strong performance of its subsidiary, Taco Bell. The restaurant chain witnessed a 6% growth in same-store sales in the U.S.. With its new Cantina Bell menu in place, the restaurant may soon take over Yum!’s rival, Chipotle Mexican Grill, Inc. (NYSE:CMG), when it comes to Mexican food demand.
This will be welcome news for Yum!. Taco Bell’s offerings of burritos and innovative items such as its Doritos Locos Tacos at much cheaper prices are believed to be eating into Chipotle’s market share. Taco bell’s burritos are not only cheaper than the ones Chipotle sells for around $7 each, they apparently also taste similar.
According to a survey by David Einhorn’s hedge fund, 75% of Chipotle’s customers frequent Taco Bell. Brand loyalty clearly isn’t going to save Chipotle Mexican Grill, Inc. (NYSE:CMG) in this rat race. Chipotle, known for its upscale ambience and richer clientele, may soon have to consider a price slash if it wants to maintain its market share in Mexican food.
From here on
Yum! did not do too badly in the previous quarter. In fact, it managed to beat analysts’ earnings estimates by $0.15 per share. It also is a relatively cheap buy as compared to Chipotle Mexican Grill, Inc. (NYSE:CMG). However, Yum! Brands, Inc. (NYSE:YUM)’s growth in the next few quarters looks a tad uncertain, to say the least. Until the company regains its foothold in China, which accounts for approximately 40% of KFC’s profits, I would like to remain on the sidelines. The best bet would be to wait until the company’s growth picks up, and then go long.
The article Will This Company Continue to See Good Times? originally appeared on Fool.com.
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