With China's Troubles Behind It, Yum! Brands Needs More Focus Elsewhere

Lackluster earnings signal there's more work the restaurant operator needs to do both here and abroad.

Jul 17, 2014 at 4:26PM


It's clear Yum! Brands (NYSE:YUM) is back on track in China, with its second-quarter earrings report yesterday confirming that consumers are once again flocking to its KFC chicken chain. The problem, though, and the reason the restaurant operator's stock fell after hours, is that the rest of the world doesn't feel the same affinity. Overall, revenues and profits came in below analyst expectations.

Looking at the cup as half-full, whatever lingering doubt there might have been about the health problems Yum! suffered last year in China are dispelled. Revenues surged 21% there in the last quarter, driven by a 7% increase in new restaurants opened, but also a 15% jump in same-store sales. Of course, since last year's second quarter represented the absolute nadir of Yum!'s China chicken crisis -- it experienced comps decline of 36%, 25%, and 13% across the three-month period -- it would have been more surprising had the numbers not shown such a dramatic turnaround.

Since China accounts for about half of Yum!'s revenues, it's key that KFC regained its footing there, but with the rest of its portfolio reporting bland results, it remains essential it tackle those issues quickly.

India, for example, which Yum! has identified as one of most important long-term growth markets, saw revenues widen by 18%, but only because it increased its store count by 25%. Same-store sales took another step back, declining 2% in the quarter, and it's still recording operating losses there, albeit somewhat improved from the year-ago period.

Similarly, both its Pizza Hut and Taco Bell divisions reported mixed results, with both chains seeing better results internationally but missing here at home, either showing comps that fell from last year or missing analyst expectations. Both continue to suffer in the U.S. because of consumers changing preferences, opting instead to dine at fast-casual chains but largely avoiding other niches, including fast food, casual, and family dining.

Although Yum! said it's pleased with its new Taco Bell breakfast offering, which includes among other menu items a Waffle Taco, it wasn't enough to boost comps at the chain to match expectations. The cantina reported that same-store sales rose 2% in the second quarter, but that was below the better-than-3% gain Wall Street was looking for.

That's got to be a source of relief for McDonald's (NYSE:MCD), which is itself under pressure from new rivals entering the breakfast daypart from all corners. With McDonald's the leading provider of breakfast meals, holding a 30% share of the segment, Taco Bell, White Castle, and other nontraditional restaurants are suddenly interested in offering the meal to consumers.

Still, it's got to be a bit worrisome nonetheless, because whatever gains Taco Bell (or White Castle, too, for that matter) makes comes at the expense of McDonald's. Just because consumers aren't beating feet back to Yum!'s chain as much as analysts thought they would doesn't mean it's not making inroads.

With more than 40,000 restaurants in over 125 countries, Yum! Brands has a diverse portfolio, and it's constantly opening more locations every quarter. It plans to open 700 new restaurants in China this year and an additional 1,250 new restaurants -- mostly KFCs and Pizza Huts -- in other emerging markets, but this far-flung empire seems almost unwieldy at the moment. 

When avian flu hit Yum!'s KFC chain in China, the company hunkered down and worked on getting a handle on restoring customer confidence. The problems at its other divisions aren't as extreme as what occurred then, but they're causing a drain on operating profits, and a more focused approach might be necessary to get them back on track as well.

You can't afford to miss this
"Made in China" -- an all too familiar phrase. But not for much longer: There's a radical new technology out there, one that's already being employed by the U.S. Air Force, BMW and even Nike. Respected publications like The Economist have compared this disruptive invention to the steam engine and the printing press; Business Insider calls it "the next trillion dollar industry." Watch The Motley Fool's shocking video presentation to learn about the next great wave of technological innovation, one that will bring an end to "Made In China" for good. Click here!

Rich Duprey 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.

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