Yum! Brands Is Humbled and Angry

Pizza Hut of Yum! Brands looks poised for growth based on results from Domino’s Pizza and Papa John’s.

Feb 14, 2014 at 4:31PM

Yum! Brands (NYSE:YUM) has a long history of success and the company continues to have a bright-looking future. Its KFC, Taco Bell, and Pizza Hut chains are all growing and they are expected to continue doing so in the future. Yet, despite Yum! Brands' past success and future outlook, the company is humbled and angry about something that occurred in 2013.

Yum! Brands results
On Feb. 3, Yum! Brands reported fiscal fourth-quarter results. Worldwide system sales grew 3% although in the U.S. they slid back by 1%. Same-store sales dropped by 4% in China and 2% in the U.S. and grew by 2% elsewhere. Earnings per share tacked on a 4% gain to $0.86.

CEO David Novak called it "a challenging year." Toward the beginning of the conference call he stated with pride, "If you follow this over the years, you know one of the things we are most proud of as a company is our ability to drive, what we call, dynasty-like performance, which is generating at least 10% growth in earnings per share year after year."

Why Novak is angry and what he plans to do about it
The year of 2013 marked the first year out of the last twelve that Yum! Brands failed to grow EPS by 10%. Novak added, "2013 was frankly a very humbling year." He's determined to make up for it in 2014 by increasing earnings per share by a bare minimum of 20%.

The main way that Yum! Brands expects to improve results is by simply opening thousands of locations around the world. With growth or no growth on the individual store level, the average restaurant of each of the three concepts is highly profitable.

For KFC, Yum! Brands saw a 13% plunge in same-store sales and a 23% plunge in operating profit in China. Since the company has 4,600 KFC locations in China, this resulted in quite a hit to the top and bottom line for Yum! Brands as a company. Between a poultry scare and avian flu fears, Yum! Brands has had to work hard to rebuild trust in its KFC brand in China. It has "made significant progress [in] rebuilding consumer trust." Yum! Brands pointed out that "key brand attributes scores are nearly back to where they were in 2012." It sounds like the biggest drag on 2013 may no longer be as much of a drag, and Yum! Brands is back in business.

Meanwhile, Taco Bell continues to kick butt and it grew same-store sales for the eighth quarter in a row. Taco Bell alone produced two-thirds of all of Yum! Brands' profits in the U.S. for 2013. The company attributes the success of Taco Bell to product innovation, great marketing, and expansion of restaurants. It plans to do more of that in 2014 which will help drive overall earnings per share for Yum! Brands higher by over 20%. It probably doesn't hurt that Taco Bell will start serving breakfast this year.

Last but not least, Pizza Hut is well positioned to contribute handsomely in 2014. Same-store sales grew 5% in the quarter, despite going up against a tough comparison last year. Part of the reason for the success came from digital ordering, which now makes up 40% of Pizza Hut's sales.

Digital is killing it
Domino's Pizza (NYSE:DPZ) and Papa John's (NASDAQ:PZZA) have reported surging digital sales right along with Pizza Hut. Papa John's President Tony Thompson states that the surge in online and mobile ordering is resulting in customers ordering more frequently and spending more per order. All three are seeing around 40% of their sales now coming from digital.

Domino's CEO J. Patrick Doyle explains that Domino's, Papa John's, and Pizza Hut are taking market share from the mom and pops and the regional chains that don't have this capability. Domino's Pizza added that mobile sales in particular jumped 102% last quarter. This bodes well for Pizza Hut too.

Foolish final thoughts
Toward the end of his presentation Novak boldly stated, "We have recognized that 2014 is to be a show me, don't tell me year and we are confident we have a strong bounce back year ahead growing EPS at least 20%, reestablishing our track record of consistently delivering double-digit EPS growth year after year after year."

When it comes to business, never underestimate a man or a woman CEO who has a long history of credible success and who is currently very determined and angry. Don't be surprised if Yum! Brands in fact beats that 20% forecast by a mile. Yum! Brands deserves a closer look by Fools as all three brands appear well-positioned to contribute to a potentially big comeback.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool owns shares of Papa John's International. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.

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