Yum! Brands (NYSE:YUM) delivered some dismal earnings on Tuesday along with downbeat guidance. The company's most important market, China, continued to suffer from a poultry-supply issue that has lingered since last December. With same-store sales down in the region and flat in the United States, the market is finding plenty of reasons to send the stock down. But not all is fowl with the parent company behind KFC, Pizza Hut, and Taco Bell. One area of Yum!'s business continues to thrive and grow well into the double digits. It may not be the company's most important segment today, but it very well could be in the near future. Here's why Yum!'s earnings weren't so bad.
A bad time
Sure, same-store sales at KFC in China dropped 14% and the company doesn't expect the fourth quarter to be much better. And, OK, the U.S. market isn't too strong at the moment, either, with flat sales overall, despite a healthy 4% uptick at Taco Bell. In the past decade, buying Yum! stock wasn't about the U.S., it was about Chinese and emerging-market expansion. The company already experienced its meteoric rise from the China expansion -- and management mentioned it was opening an impressive 700 more stores throughout the year -- but it's the latter that holds future growth.
Even during Yum!'s dismal third quarter, India market sales grew 24%, while International emerging markets grew 11%. Yum! Restaurants International and India will have record new-store openings this year -- more than 1,000. The stores are largely franchised in these regions, which include Russia, South Africa, Argentina, Mongolia, and more. The franchise model is great for keeping up-front costs down and gross margins up. By 2015, the number of restaurants in India alone will have doubled to 1,000. Both unit growth and same-store sales growth in Yum! Restaurants International and India are driving the numbers higher.
As times goes on and the number of units compared to the company's total gains its share, YRI and India will become greater factors to the company's overall earnings. In the third-quarter earnings announcement, management is still fully confident in the company's ability to resume growing earnings in the double digits on an annual basis starting in 2014 and onward.
The wounds will heal
Investors and analysts wanted more out of China, and the company did fall beneath expectations in its recovery effort. Investors need to realize, though, that this is a short-term event, and does not rattle the foundation of this incredible growth stock. Even in this wretched quarter, the company increased its dividend by 10% -- the ninth consecutive quarter of such action. Yum!'s problems are surface-level and do not threaten the long-term future. This is clear in the incredible growth the company still found in YRI and in India.
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