The Future's Not Looking Too Bright for Yum! Brands

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This year hasn't been particularly kind to Yum! Brands, (NYSE: YUM  ) . Whereas the S&P 500 has risen by 16.5% year-to-date, shares of Yum! Brands have barely broken even with a return of 1.8%. The reason behind this shortfall can be chalked up to mediocre operating results for the year.

Perhaps the most circulated piece of news impacting the company's share price lately has been its third quarter earnings release, which stated that the company's earnings per share declined by 68%. Although sales of its KFC business have been down in China due to controversy surrounding its poultry supply and how it may place consumers at risk following an avian flu outbreak, the bulk of the news involves the company's writedown of intangible assets relating to its acquisition of Little Sheep, the no. 1 brand in China's casual dining space.

Though it is hard to argue that this news isn't bad, it might actually overshadow potentially more damaging developments for the company. To illustrate this, let's look at the larger trend for the company's revenue. Year-to-date, the company's revenue declined by 6.1% compared to the same nine-month period a year ago. If this decline were happening in China only, then it would be understandable. Unfortunately, the big picture is far worse than that.

Geographical data
While it is true that the company's Chinese operations are performing poorly with same-restaurant sales down 16% year-to-date, the 12% increase in restaurant count across the country helped to offset it. As a result, the year-to-date revenue decline for the company was limited to 2.7%. Though it is good that the company is expanding its footprint at such a large rate in its largest market, seeing such a large decline in sales in such a short period of time could indicate that its market position is deteriorating at a good clip.

In addition to suffering in China, the company is suffering in its YRI segment, which is comprised of all locations internationally with the exception of China, India, and the United States. In this segment, the company saw a third-quarter revenue drop (relative to the same quarter a year ago) of 6.5%, effectively matching the company's year-to-date decline.

If this isn't bad enough, the company is also performing poorly in the United States, with an astonishing 13.2% revenue decline (though it is worth mentioning that the company's same-restaurant sales growth in the United States was 1%, indicating that locations that are staying open do have some growing power). While the United States made up only 23.4% of the company's consolidated sales in 2012, such a large setback is indicative of potential changes occurring in consumer trends.

The new boys on the block
If you take a moment to sit back and think about all this, it does make sense. Here we have a company that deals primarily in fast food. Historically, food was divided between two categories; fast food and casual dining. As consumers have become more finicky, however, new opportunities began to become available. Two such examples are Chipotle Mexican Grill (NYSE: CMG  ) and Panera Bread (NASDAQ: PNRA  ) . Both of these restaurants are classified as quick casual dining establishments.

As companies that offer healthier choices costing just slightly more than traditional fast food restaurants, Chipotle and Panera have seen a swarm of interest from consumers. This is demonstrated by their amazing growth rate over the past five years. Panera, for instance, has seen its revenue grow by 64% over the past five years. Chipotle's growth has been even more impressive at 105%. From the perspective of net income, these companies have seen an increase of 157.3% and 255.5%, respectively.

During their most recent fiscal quarter, Panera and Chipotle are stacking up the gains. Panera, for instance, has seen its second-quarter revenue grow by 11% compared to the same quarter a year ago, while its net income has increased by an even more impressive 15.6%. Chipotle's top-line growth was even greater at 18.2%, though its net income increased by only 7.6% as its cost of goods sold as a percentage of revenue grew from 70.8% to 72.4%.

Foolish takeaway
Nothing is certain, but the future of Yum! Brands seems to be in doubt. I'm not trying to proclaim that it is headed toward bankruptcy or anything of that sort, but I do believe that the numbers being focused on the most (those relating to its operations in China) are merely masking a larger problem of long-term viability for the company due to a major shift in consumer tastes domestically.

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Yum! Brands CAPS Rating: ****