Yum!'s international presence is clouded by falling sales in growth markets. Source: Yum! Brands
When global fast food restaurant behemoth Yum! Brands (YUM 0.75%) reported earnings for its fourth quarter and full year Wednesday afternoon, investors got more of the same disappointment in China that has been the story for more than a year. Issues with food suppliers have severely affected the reputation of the KFC brand there, and the fact really showed when Yum! reported same-store sales declined a whopping 16% at KFC in China last quarter.
Some other highlights -- or lowlights -- from the earnings release:
- Total sales in China fell 11% in Q4, and China reported negative comps for the full year.
- The company took a $361 million writedown related to the Little Sheep restaurant acquisition, leading to a net loss in the quarter.
- Total global sales increased 3% for the year, while restaurant margin and operating profits fell.
Yum! is facing a lot of headwinds to reigniting growth. Let's take a closer look at the details and dig into whether there is any value here for investors.
Beating a dead chicken
Yum!'s Chinese problems go back as far as 2012, when the first of two major scandals around chicken suppliers occurred, and frankly the company's sales have yet to really reestablish in the country. The resulting impact on the company's results has led to poor returns:
Yum Total Return Price data by YCharts
China may only be one market, but its impact on Yum! is outsized, with the China division's $6.9 billion in sales in 2014 accounting for more than half of the company's revenue. The impact to KFC's reputation has clearly been significant -- as last quarter's 16% drop in comps reflects -- but Yum!'s Chinese problems extend far beyond just KFC.
Pizza Hut in China actually reported worse comps for the full year, with a 5% decline in same-restaurant sales in 2014, versus the 4% decline at KFC. Furthermore, the company's efforts to diversify and grow multiple concepts in the Middle Kingdom seem to be failing, with the company taking a $361 million writedown related to the Little Sheep restaurant chain.
Here's the thing: Yum! took $258 million in impairments on Little Sheep in 2013, and claims a carrying value of $100 million on the chain. Considering that Yum! paid $586 million in 2011 to buy the 70% of the chain it didn't already own, Little Sheep can be chalked up as a failure so far.
U.S. remains stagnant, but Taco Bell a bright spot
The U.S. is Yum!'s second most important market, and the Pizza Hut and KFC chains continue to lose traction with consumers, even as the company invests in rebranding and marketing. CEO Greg Creed said this about Pizza Hut's struggles:
Finally, while the initial relaunch of the Pizza Hut brand in the U.S. did not deliver the sales lift we expected, consumers have responded positively to the new menu and we intend to leverage this more effectively going forward.
Frankly, it's the sort of thing CEOs say when there's not really anything good to say.
Taco Bell, however, is having some success in the U.S., with comps up 3% globally and in the U.S. for the year. In the fourth quarter, the chain reported 7% comps growth, largely driven by an expanded menu and daypart growth into breakfast.
Looking ahead
Yum! Brands is the dominant global fast food operator, with easily the most restaurants in the most countries. However, its falling comps in China, stagnation in the U.S. at two of its chains, and now negative comps in India -- where it operates over 800 restaurants -- tell a story that's concerning.
Management keeps reiterating its promise "to return to double-digit earnings per-share growth," but until management can figure out a way to stop the bleeding comps, they are going to have a hard time living up to that promise. The company pays a moderate 2.2% dividend yield and has a track record of regular increases, but there are better opportunities today for both income and potential share price growth.
Until management shows it can grow sales at existing stores, Yum! Brands is likely to leave a bad taste in investors' mouths.
