Yum! Brands May be on Track for Shareholder Backlash

Sure, the market reacted favorably to Yum!'s Q4 earnings, but that is no match for the company's inherent risks.

Feb 23, 2014 at 12:13PM


Screen Shot

Taco Bell's Fresco Menu. Source: Taco Bell.

Yum! Brands (NYSE:YUM) released its fourth quarter earnings earlier in the month. Although shares went up 9% the following day, there are still a number of risks that investors should consider before buying in to the fast food giant.

A recent USDA study states that working-age adults are beginning to consume fewer calories, and are choosing to abstain from eating at fast food restaurants . This, combined with lackluster earnings, could spell a big risk for Yum! shareholders.

Getting on the health bandwagon
With caloric intake on the decline and trust in organic products increasing (42% of parents report that their trust in the organic seal has increased),  Yum! -- offering high calorie options with no organic ingredients -- will have a lot of catching up to do. Adults in the U.S. are choosing to eat at home more often , and when they do choose to eat out they are increasingly concerned with the quality and source of what they are eating .

Yum!'s major brand offerings, KFC, Pizza Hut, and Taco Bell, aren't exactly the poster children of health-conscious eating. Sure, Taco Bell has taken on a healthy options menu, but such a small offering makes the chain no match for one of its greatest competitors, Chipotle Mexican Grill (NYSE:CMG).

What has Yum done for you lately?
Yum!'s earnings have left a bit to be desired recently. For instance, US same store sales were flat for 2013. Sure, Taco Bell grew at 3%, but Pizza Hut and KFC negated that improvement with each brand declining by 2%. Compare that to Chipotle, which saw comparable store sales increase by 5.6%. Even though the aforementioned market reaction was positive, Yum!'s long term product relevance  could be in jeopardy.

Of course, it shouldn't be assumed that Yum!'s limited health-conscious and sustainably sourced menu items are to blame for the company's flat growth. But ignoring the emerging trend of conscious consumption won't bode well for the fast food giant.

Don't turn a blind eye
In recent years, fast food chains have been the center of inquiries from meddling bloggers that questioned the industry's choice of ingredients. . For instance, Chick-fil-A, a direct KFC competitor, was challenged to take artificial dyes and antibiotics out of their supply chain. Due to the pressure that Chick-fil-A felt from this conscious-consumer blogging movement, the chicken chain has committed to phasing out antibiotic within 5 years. The landmark announcement was also in reaction to surveys documenting that 70% of customers rate antibiotics in meat as a top issue .

Tyson Foods (NYSE:TSN) committed to a campaign centered around chicken "raised without antibiotics," only to inject its eggs with antibiotic-laden vaccines. Chick-fil-A on the other hand, has committed to "no antibiotics ever." Yum! could take a page out of the Tyson book and only halfway commit to addressing growing consumer demand for greater supply chain transparency.

If Yum! chooses to move forward in that manner, it will likely be faced with similar challenges as Tyson, which has been recently criticized for its treatment of livestock as well as its relationship with its contract farmers. Yum!'s supply chain practices could likely come under fire as well, a risk that shareholders will likely not take too kindly to, as evidenced by the pushback Tyson recently received from shareholders. If Tyson and Yum! continue to ignore the growing concern around supply chain transparency, antibiotic use, and livestock living conditions, both companies will be facing increasing risk in the years to come. This risk should be a concern for potential Yum! and Tyson investors.

The other option for Yum! could be to take a look at how Chipotle is "cultivating a better world" through serving "food with integrity" and bet on the changing tide of conscious consumers.

Emerging markets, emerging risk
Yum! is committed to its expansion into both China and India, citing "their strategic importance and enormous growth potential ." But the company might be losing sight of what's happening on its home turf. Their choice to half-heartedly address supply chain and ingredient concerns is a risk to shareholders, and could become a detriment to its revenue stream.

The fast food mogul has an opportunity to tap into an emerging market of conscious consumers here at home, a market that boasts a loyal following. Without an earnest commitment to creating change within its supply chain, Yum!'s relevance might begin to whittle away in the States.

Is Yum! one of the Fool's favorite growth stocks?
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Leah Niu has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers