A Bummer at Yum! Brands

By Alyce Lomax | More Articles
July 15, 2010 | Comments (4)

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Investors found unappetizing tidings on the menu after Yum! Brands (NYSE: YUM ) reported its second-quarter results.

Net income decreased 5.6%, to $286 million, although Yum!'s press release emphasized that earnings would have increased 17% after backing out special items. Last year's earnings included a one-time gain of $68 million.

Yum! Brands' revenue increased 4%, to $2.57 billion. Same-store sales were neutral to pretty good. Its U.S. and international segments showed 0% and 1% comps growth, while the mighty China division provided a 4% boost in same-store sales. Fortunately for Yum!, the company behind KFC, Pizza Hut, Taco Bell, and Long John Silver's, it has a vibrant Chinese division to make up for U.S. malaise.

However, several elements of Yum!'s report made investors choke. The company's full-year outlook was disappointing, predicting 2010 earnings of as much as $2.43 per share, instead of the $2.48 per share analysts expected.

Yum! Brands' impressively large presence in China -- which contributed 33% of the company's quarterly operating profit -- attracts many investors to its shares despite the many stock choices in the quick-serve market, such as McDonald's (NYSE: MCD ) , Chipotle (NYSE: CMG ) , Burger King (NYSE: BKC ) , and Wendy's/Arby's (NYSE: WEN ) . But the Chinese factor can complicate things, too.

First off, Yum! is paying increasing salaries in China, where labor costs are rising in response to labor unrest in many parts of the country. Higher wages will certainly pinch Yum!'s profits, as could the "commodity inflation" lurking on the horizon.

It's great that Yum! is doing well in China. But if you're not a fan of wrangling with currency translation, the riskiness of a strong emphasis on international markets -- with their different regulatory and cultural elements, and the confusing press releases those convolutions prompt -- then investing in Yum! Brands might not be for you. The company's certainly not high on my personal watch list.

Given some of the pressures that may drag down Yum! Brands in the remainder of the year, I think a wait-and-see approach may be for the best overall -- even for investors who love translating currencies and deciphering byzantine earnings reports.

Do you think now's a great time to buy Yum! Brands? State your case in the comment box below.

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Chipotle is a Motley Fool Rule Breakers recommendation. Chipotle is a Motley Fool Hidden Gems selection. Motley Fool Options has recommended a bull call spread position on Yum! Brands. The Fool owns shares of Chipotle.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (8)

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Report this Comment On July 15, 2010, at 6:03 PM, richie54 wrote:

I've worked at two very well-known universities in the Boston area since the mid-1980's. This news does not surprise me the least. Now, more than ever, with all of the foreign students from China studying in the United States, McDonald's wins the fast food game, hands down.
Yum Brands is a very distant second and will never be able to overtake the McDonald's brand in China, ever.
Report this Comment On July 15, 2010, at 6:08 PM, junaidfarooq wrote:

I own the stock and have a long time horizon - that is not 3-4yr but 25years - and I find it foolish to read too closely into quarterly numbers. Domestic demand and consumption in developed world (including US) would continue to falter while that in emerging markets would continue to rise and fast food is a great way to play on that paradigm shift in domestic demand.
People who look at rising labor costs in China completely miss the point - higher salary means higher disposable income leading to higher discretionary spending and american fast food is anything but a poor man's food in China and the rest of emerging world.
Report this Comment On July 15, 2010, at 9:33 PM, iamnik77 wrote:

Taco Bell provides a meal at a good value if you buy the basic tacos or bean burritos. However, if you venture into their selection of premium items you will fork over more than you would at a casual dining restaurant (such as Chipotle) and you will get lower quality ingredients. A chicken burrito at Chipotle is a a meal for between six and seven dollars but you would need to buy 3 chicken items (which will probably cost over eight dollars) at Taco Bell to get the same quantity and you will not come close to the quality of the food at Chipotle. So, when I am in the mood for American style Mexican food I go to Chipotle or Qdoba which are providing by far the better value to the customer.
Report this Comment On July 16, 2010, at 7:51 AM, mberan wrote:

Richie54, a clarification. KFC is much larger than McDonald's in China. They built there in large numbers in the 90's while McDonald's did not. Chicken is a favored food over beef in most of Asia. While they outnumber McDonald's, the sales of McD's is growing as well as the number of restaurants. McD has made it known it will not try to challenge the numbers that KFC has, but rather get premium sites that make money and not just premium sites that lose money just to be there.

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