Fast-food restaurant operator Yum! Brands (NYSE:YUM) surprised the markets with better-than-expected profits in its most recent quarter as its business in China -- which it plans to spin off -- may have finally stabilized. Though management is attempting to increase shareholder value through several capital allocation strategies, there are headwinds facing the company's various chains.
In this clip from the Motley Fool Money radio show, Chris Hill and Jason Moser take a look at Yum! Brands' second-quarter earnings, its near-term plans, and the uncertain bedrock upon which the company's long term is built.
A full transcript follows the video.
This podcast was recorded on July 15, 2016.
Chris Hill: Shares of Yum! Brands up this week after second-quarter profits came in slightly higher than expected. The parent company of KFC, Taco Bell, and Pizza Hut reported same-store sales in China that were flat, but that's certainly better than what we've seen out of China in the past, Jason.
Jason Moser: Yeah. Historically weak quarter and tough comps. It was a decent quarter. The story with Yum! Brands, it's a really interesting situation here for investors where there's clearly a near-term catalyst in the shares and its recapitalization program that management's implementing. Levered up the balance sheet a little bit, starting to buy back a lot of shares in advance of this China spin off, which is going to happen by October.
But from there, I think, then it becomes a bit more of a question mark. If you look at the history of Yum! Brands, you go back to 2011, they had a really hard time actually growing their top line. Revenue has been relatively flat here for the past four or five years. And that has to be a concern, particularly domestically here. You see the success of McDonald's with their all-day breakfast, rolling that out even more, so your Taco Bells here and KFCs, domestically speaking, are a little bit more challenged than before. But again, I think the near-term catalyst is obvious. Since 2011, management brought the share account down about 10%. That's going to continue. And I think that's a way that shareholders can see some value there, some capital gains in the share price.
But beyond that, once this spinoff happens, I think investors need to take another look here and assess if there's really a bright future for either entity.