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

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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.

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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.

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