Yum! Brands (NYSE: YUM) doesn't look so tasty right now. Though the company's first-quarter results seem decent enough, they can't disguise the foul flavor of its recent bad press.
Fourth-quarter net income increased 27%, to $274 million, or $0.56 per share. Total sales increased 7% prior to currency translation. China's sales strength really shone, up 19%; U.S. sales jumped a more modest 5%. Same-store sales increased 8% in China and 5% in the U.S.
Yum! Brands, which runs Taco Bell, Pizza Hut, and KFC, is well known for its success in China, as the impressive sales results there clearly demonstrate. However, labor costs in China are increasing at a mid-teens clip. That promises to create a profit-pinching challenge, given the company's huge stake in its Chinese success.
Things look similarly unsavory for Yum! Brands here in the U.S., though that owes more to the glut of quick-serve competition from the likes of McDonald's (NYSE: MCD), Sonic (Nasdaq: SONC), Burger King, and Wendy's/Arby's (NYSE: WEN).
Yum! Brands has also been busy defending its reputation against a lawsuit that questions the quality -- heck the very existence -- of Taco Bell products' ground beef. The suit alleges that the "meat" in Taco Bell's beef tacos is so adulterated by fillers that it contains only 35% actual beef. The company counters that its tacos contain 88% beef, mixed with seemingly innocent ingredients like water, oats, spices, and cocoa powder.
We'll see whether consumers take the suit's unappetizing allegation to heart and flee to rivals. Chipotle Mexican Grill (NYSE: CMG) has notably made food quality a major focus of its business message, touting its use of organic and natural ingredients.
On the other hand, Yum! has successfully combated high-profile embarrassments before; in 2007, it dealt with an E. coli outbreak connected to its food, as well as a video of one of its Taco Bell/KFC stores being overrun by rats.
An unappetizing PR debacle, rising costs for Chinese labor, and spiking commodity prices (including in China, where the company said it has already raised some menu prices) all converge to make Yum! Brands look a little less appetizing at the moment. What do your tastebuds tell you? Serve up your opinion of the stock in the comments box below.
