Yum! Brands (NYSE:YUM) is the global fast food giant behind Taco Bell, KFC, and Pizza Hut. The company has been trying to steal market share away from McDonald's (NYSE:MCD) breakfast business, while reenergizing its sales in China. As Yum! approaches another earnings release, investors are eager to hear how this two-part strategy is playing out.
Yum!'s second-quarter 2014 earnings are on tap this Wednesday. Here are two key things to watch.
It's no secret that "traditional" fast-food restaurants like Yum! and its largest competitor, McDonald's, are struggling here in the U.S. In a recently released fast-food survey by Consumer Reports, McDonald's, along with Yum!'s Taco Bell and KFC, rounded out the bottom of their respective categories. This sour consumer sentiment has been evident in both Yum!'s and McDonald's recent U.S. results.
In Yum!'s last quarter, U.S. same-store sales fell 5% at Pizza Hut, 4% at KFC, and 1% at Taco Bell. Comparatively, McDonald's only saw a same-store sales slump of 1.7% in the U.S. While Yum! has built China into, arguably, the most important part of its business, it still needs to turn the tide in the U.S. To do so, Yum! is relying on its best-performing U.S. brand, Taco Bell, to steal breakfast sales away from McDonald's.
We've all seen the humorous ads in which "Ronald McDonald" endorses the new "waffle taco"; now it's time to see if they're paying off. In Yum!'s last quarter, CEO David Novak acknowledged the difficulties of challenging McDonald's breakfast supremacy as he said: "We've gotta break major habits. People have a tendency to do the same thing every day. It's hard to even get our current users to give us a try." Still, Novak is optimistic that breakfast will take Taco Bell from 5,000 stores in the U.S. to 8,000. Taco Bell's breakfast menu launched at the very end of Yum!'s last quarter. This week's call will show us if breakfast is really going to be Taco Bell's catalyst for 8,000 stores.
China business is key
Despite its tough battle in the U.S., Yum! still beat earnings expectations by $0.03 in Q1. The biggest reason was its Chinese business, which showed an impressive 9% jump in same-store sales. Top-line sales were up 17% in China and, most important, KFC's comparable sales surged 11%.
Last year, Yum!'s business suffered due to food quality concerns and a bird flu panic in China that severely hampered KFC. Things look to be back on track for Yum! in China; it's expecting to open 700 locations this year. Investors should expect same-store sales to rise even higher than last quarter's 9% gain, because last years "comps" were so weak. If Yum! can't beat last quarter's same-store sales growth now that more time has helped distance it from food-quality concerns, something may be wrong.
Foolish conclusion: A call worth listening to
Yum! Brands is at an interesting point, with as much concern surrounding the company as opportunity. During last quarter's call, Yum!'s management reiterated its targeted 2014 EPS growth of 20%. The company has a chance to hit that number, coming off reasonable comps, but only if these two key points of its strategy are met.
This Wednesday, breakfast and China are the things to watch.
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Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends McDonald's. 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.