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Yum! Brands Loses Flavor

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Yum! Brands (NYSE: YUM  ) doesn't look so tasty right now. Though the company's first-quarter results seem decent enough, they can't disguise the foul flavor of its recent bad press.

Fourth-quarter net income increased 27%, to $274 million, or $0.56 per share. Total sales increased 7% prior to currency translation. China's sales strength really shone, up 19%; U.S. sales jumped a more modest 5%. Same-store sales increased 8% in China and 5% in the U.S.

Yum! Brands, which runs Taco Bell, Pizza Hut, and KFC, is well known for its success in China, as the impressive sales results there clearly demonstrate. However, labor costs in China are increasing at a mid-teens clip. That promises to create a profit-pinching challenge, given the company's huge stake in its Chinese success.

Things look similarly unsavory for Yum! Brands here in the U.S., though that owes more to the glut of quick-serve competition from the likes of McDonald's (NYSE: MCD  ) , Sonic (Nasdaq: SONC  ) , Burger King, and Wendy's/Arby's (NYSE: WEN  ) .

Yum! Brands has also been busy defending its reputation against a lawsuit that questions the quality -- heck the very existence -- of Taco Bell products' ground beef. The suit alleges that the "meat" in Taco Bell's beef tacos is so adulterated by fillers that it contains only 35% actual beef. The company counters that its tacos contain 88% beef, mixed with seemingly innocent ingredients like water, oats, spices, and cocoa powder.

We'll see whether consumers take the suit's unappetizing allegation to heart and flee to rivals. Chipotle Mexican Grill (NYSE: CMG  ) has notably made food quality a major focus of its business message, touting its use of organic and natural ingredients.

On the other hand, Yum! has successfully combated high-profile embarrassments before; in 2007, it dealt with an E. coli outbreak connected to its food, as well as a video of one of its Taco Bell/KFC stores being overrun by rats.

An unappetizing PR debacle, rising costs for Chinese labor, and spiking commodity prices (including in China, where the company said it has already raised some menu prices) all converge to make Yum! Brands look a little less appetizing at the moment. What do your tastebuds tell you? Serve up your opinion of the stock in the comments box below.

Chipotle is a Motley Fool Rule Breakers recommendation. Chipotle is a Motley Fool Hidden Gems choice. The Fool owns shares of Chipotle and Yum! Brands. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy is made from 100% all-natural disclosure.

Read/Post Comments (6) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 03, 2011, at 2:29 PM, pondee619 wrote:

    "Yum! Brands (NYSE: YUM) doesn't look so tasty right now" The market seems to disagree: "YUM $49.74 +2.01 +4.21% "

    "Fourth-quarter net income increased 27%"

    "Same-store sales increased 8% in China and 5% in the U.S."

    "Fourth-quarter net income increased 27%"

    gotta go with the market on this one. YUM looks fine.

  • Report this Comment On February 03, 2011, at 2:45 PM, TMFKris wrote:

    I don't think Taco Bell and Chipotle serve the same customers. Taco Bell's fare is quite cheap and it must be tasty to be so popular. Will a significant number of American Taco Bell customers be put off by the lawsuit?

    Kris - TMF copyeditor

  • Report this Comment On February 03, 2011, at 4:31 PM, goalie37 wrote:

    How dare you bash SIRI again Alyce...Oh wait, wrong article.

  • Report this Comment On February 03, 2011, at 6:54 PM, midnightmoney wrote:

    It has been scientifically proven that Taco Bell's beef actually contains 106% beef. This was made possible by a laboratory breakmoo in which extra beef essence was actually paragrafted into the black piebald bits of some heretofore unsullied hereford bulls which were, for lack of a better perm, shaken. An algorithm was bitten. Another one can be tanked up or down to prevent said chinese wage relation para-entities from rabblerousin bout the issue of wage raises. they'll set our prophets back nothing less than light-years.

  • Report this Comment On February 03, 2011, at 7:31 PM, fawncee2 wrote:

    Alyce, you are uninformed--how'd you get this gig?

  • Report this Comment On February 04, 2011, at 9:59 AM, rageatm wrote:

    Wen.... looking like the overbuy is correcting. Time to take the gains off the table.

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