It's shaping up to be another difficult day on Wall Street, but at least Yum! Brands (NYSE:YUM) has given the bulls something to nibble on. For the second straight quarter, the operator of popular fast-food chains Taco Bell, Pizza Hut, and KFC has posted better-than-expected bottom-line results and lifted its full-year outlook.
This morning, the company announced that third-quarter adjusted earnings jumped 18% to $0.71 per share, narrowly topping estimates, and boosted its fiscal 2005 earnings forecast by two cents to $2.64.
Once again, shareholders have Chinese consumers to thank for the company's performance. Here at home, operating profits sank 4% on revenues that ticked up just 2% to $1.4 billion. Blended same-store sales (an aggregate measure of comps at all three chains) showed a healthy 4% gain, but much of that was offset by the refranchising of more than 125 former company-owned stores, which shifts revenues at those locations off the company's books. However, the changes did help franchise fees -- 58% of which are generated domestically -- rise 10% to $268 million.
While stateside results were a little bland, Yum!'s operations in China continue to spice up the firm's overall growth rates. With KFC and Pizza Hut locations popping up quickly (more than 375 are expected to open this year alone), revenues in that division climbed 20%. Meanwhile, operating profits -- with the help of a $14 million payment from a seasoning supplier linked to a costly food dye problem -- spiked 32% for the quarter. China accounts for only 16% of Yum!'s total sales but produces around one-fourth of its operating income. Not surprisingly, it has superior restaurant margins of 20.6%, compared with 12.7% in other foreign markets and 14% in the U.S.
While the shares aren't exactly value-meal-priced, Yum! is beginning to look tempting. Growth in China continues unabated, aggressive expansion and healthy comps are keeping the top line humming along, and recent margin contraction was primarily due to the shuttering of underperforming stores. In their place, the company is actively converting many restaurants into multibrand locations. The number of these higher-volume stores has risen 17% since last year to around 2,900, which composes 16% of the firm's total U.S. store count.
Furthermore, the company has generated more than $1 billion in operating income so far this year, 32% greater than last year's pace, which has helped fund nearly $680 million in share buybacks. Also, return on invested capital (ROIC) checks in at 18% -- the best in the business. Finally, after being the black sheep in the family for many months, KFC is back on track, propelled by the sale of more than 100 million Chicken Snacker sandwiches since March. (Pizza Hut has at least temporarily taken its place as the laggard.)
Of course, Yum! Brands isn't the only fast-food purveyor at the top of its game these days. McDonald's (NYSE:MCD) has delivered 29 consecutive months of rising same-store sales, and rival Wendy's (NYSE:WEN) has trimmed down its operations, with plans to increase dividends, strengthen the balance sheet, and downsize the percentage of company-owned units. With tasty improvements such as those, investors might want something from this food group represented in their portfolio diet.
Fool contributor Nathan Slaughter misses the old Taco Bell Wild Sauce. He owns none of the companies mentioned.
