Making Chicken, Pizza, and Money -- Lots of Money -- in China

Second-quarter earnings for Yum! Brands (NYSE: YUM  ) came in earlier this month, and while they're a bit of a mixed bag, in the end they net out rather nicely for investors. Here's the good, the bad, and the bogus of it all.

The good
Yum! owns and operates fast-food and casual-dining stalwarts Taco Bell, KFC, and Pizza Hut. Thanks to the latter two, growth abroad is where we find the good news at Yum!. That's particularly true in China, where operating profit grew 25%, same-restaurant sales were up 18%, and 99 new restaurants opened. Less spectacular, but still notable, operating profit internationally (excluding China) grew 11%, same-restaurant sales were up 2%, and 142 new restaurants opened.  

Posting strong numbers like these, Yum! is set to give peers like McDonald's (NYSE: MCD  ) and Starbucks (Nasdaq: SBUX  )  a run for their money in China and elsewhere abroad.

The bad
For the bad news, look no further than here at home, where Yum!'s operating profit was down 28% and same-restaurant sales were down 4%. In the U.S., as Taco Bell goes, so goes Yum! -- 60% of the company's domestic profit is brought in by the ubiquitous taco maker, which is trying to recover from a bout of bad publicity surrounding a lawsuit about the company's meat.

Which brings us to ...

The bogus
In January, a California woman sued Taco Bell over the contents of its seasoned beef, claiming it was mainly meat filler. Mincing no words and sparing no bespoke-suited attorneys, Taco Bell responded quickly and aggressively by threatening a countersuit against the woman for "false statements."

She quietly and voluntarily dropped her claim shortly thereafter. Too late. The damage was done, and customers began staying away.

Yum! still a meal fit for a Fool
"It usually takes about six months to fully recover from food-related issues," said Yum! CEO David Novak on a recent conference call. The company expects Taco Bell's same-restaurant sales to still be in the negative come the third quarter, but better than the 5% decline reported for the second.

Here's the upshot of it all, fellow Fools: While Yum! Brands might continue to struggle for a while in the U.S., it will likely continue its relentless, chicken-frying, pizza-making, revenue-generating march across China, offering investors plenty of upside in the process.

Keep a peeled-eye on Yum! Brands. Add it to your watchlist.

Fool contributor John Grgurich loves Taco Bell seven-layer burritos, but owns no shares of Yum! Brands or any of the other companies mentioned in this article. The Motley Fool owns shares of Starbucks and Yum! Brands. Motley Fool newsletter services have recommended buying shares of Starbucks, Yum! Brands, and 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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  • Report this Comment On August 12, 2011, at 2:37 PM, MDuffy63 wrote:

    Interesting article, John, though I think you should have likened Yum!'s march across China to Sherman's March, laying waste to any semblance of proper nutrition with every advance. Come to think of it, this might just be our secret weapon against China's economic dominance; once Yum! is done with them they'll be a nation of gigantically obese people waddling around a wrecked landscape, suing big companies over the poor quality of the food they choose to eat, and wondering where it all went so wrong.

    That small disclaimer aside, Yum! looks pretty appetizing, from an investment standpoint.

  • Report this Comment On August 16, 2011, at 10:21 AM, XMFGrgurich wrote:

    The author responds:

    MDuffy63, thanks for the witty and insightful comment. Indeed, good old western poor eating habits may be our only weapon against Chinese economic dominance. Ha ha. And lucky for investors, they can make a profit along the way, too.

  • Report this Comment On September 06, 2011, at 4:07 PM, hughgrexsion wrote:

    I long for the days when financial advice wasn't so pithy. On the other hand, while my portfolio is tanking, my vocabulary is greatly improving.

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