Yum! Brands (NYSE:YUM), operator of Taco Bell, KFC, and Long John Silver's restaurant chains, among others, released second-quarter earnings after the market closed on Wednesday and then watched its stock drop like a rock on Thursday. Shares ended down 6.37% after the dust had settled. And that's an odd thing, because the company beat earnings estimates by almost 10%.
The apparent reason for the price decline was flat domestic same-store sales growth for the quarter and a decline in domestic comps of 3% for the last reported period, ended July 15. At least that's the reason according to some news stories.
Comparable sales is a heavily watched indicator in the restaurant sector. Recent flatness or declines at casual-dining chains such as Cheesecake Factory (NASDAQ:CAKE) are blamed on rising gasoline and interest costs affecting the consumer's discretionary spending. As people cut back on the pricier fare, one might expect to see a rise in comps at fast-food chains such as McDonald's (NYSE:MCD), and that has indeed been happening. Thus, the flat level for Yum!'s last quarter and declining levels for the quarter ended July 15 are a concern for many people.
But should investors be worried about one quarter's or one month's numbers? If it points to the beginning of a long-term trend, then yes. If the company acts relatively quickly to address the issue, then probably not. For Yum!, the problem is primarily at Pizza Hut, which, according to management, functions more like a casual-dining place than a fast-food one. But company execs say they're "all over it." For a company that overcame some serious problems in China just recently, I'm willing to bet on management's ability to control this problem. Check back in six months.
On the foreign front, stores in the China segment more than doubled their operating profit over last year and contributed 19% to the company's total. Other foreign restaurants contributed 29% to the total operating profit. Expansion plans include 400 new stores in the China segment and 750 new stores in the international division this year.
Assuming that management can get a handle on the declining comps, especially at Pizza Hut, Yum! is certainly an intriguing investment opportunity at this point. Shares reached a 52-week low yesterday. With almost half of the operating profit coming from overseas, this could be a good company to invest in for international exposure.
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Fool contributor Jim Mueller owns shares in Cheesecake Factory. The Fool points you toward its delectable disclosure policy.
