It's been a rough couple of weeks for Yum! Brands (NYSE:YUM). Just ahead of the company's earnings report, management warned that fourth-quarter comp (or same-store) sales would reverse the year-ago 21% gain to a 6% decline due to a slowdown in China.
On the news, the stock lost as much as $7, or roughly 10% of its value. But it didn't end there. Shortly after, scandal followed, which involved two suppliers to the company's KFC restaurants. Reports suggest that these suppliers used excessive amounts of antibiotics in their chickens. The company's reputation took a hit and Chinese consumers were not happy, as calls for boycotts surfaced. On this news, the stock took another 5% tumble. Yum! was not so appealing.
Big trouble in little China, but was it that bad?
The company did its best to mitigate the damage. To be fair, only two suppliers out of 30 were found to have violated health regulations. But as with everything else, it's going to take some time for the focus to shift to what was an otherwise good quarter, which included a 1% revenue growth, with a 5% increase in worldwide systems sales (which is the aggregate total of every restaurant location, whether company-owned or franchised).
Despite the bad PR and the lowered comp guidance, adjusted system revenue in China advanced 20% for the year and 11% in the quarter. Likewise, comps grew 4% for the year, despite the 6% decline for the quarter. Meanwhile, system sales for the Yum! Restaurants International segment increased 7%. And both YRI and the U.S. saw a 3% growth in comps.
In other words, amid such bad press, Yum! still outperformed McDonald's (NYSE:MCD) in some key areas. McDonald's posted just 3.1% growth across the global system compared to 5% for Yum!. Likewise, McDonald's underperformed in U.S consolidated revenue, which only advanced 2%, while posting comp growth of only 0.3% in the quarter. Granted, McDonald's is much larger, but its performance is at best on par with Yum!'s performance, especially given the negativity in China. For that matter, McDonald's China comps are still -0.9%.
Can the competition seize an opening?
Yum!'s restaurant comp breakdown was also noteworthy. The company reported a 1% decline in Pizza Hut. But KFC, which was the subject of the chicken scandal, still managed to advance 4%. Granted, the full impact of that news won't be known for at least another quarter. However, Taco Bell surged 5%, which means that Yum! is not ceding market share to Chipotle Mexican Grill (NYSE:CMG) as suspected.
However, despite Chipotle's management insisting that the company is not losing share to rivals, Chipotle posted just a 4% growth in comps. It's not a terrible number by any stretch, but it's 1% less than at Taco Bell, which recently launched its Cantina Bell line of food as a direct attack on Chipotle. So far, Taco Bell's competitive tactics seem to be working pretty well as evidenced by the comp growth.
Will China ever forgive?
The company has made it known that China, as the world's second-largest economy, is an increasingly important market. To that end, Yum! has placed big bets on future growth in that area. But it understands that growth might not come for quite some time. Management guided for a 25% decline in comps for the first quarter. Likewise, earnings per share for the full year is projected to decline by mid-single digits.
However, this is a company that has consistently posted double-digit earnings-per-share growth, while averaging 13.75% growth the past four quarters. So this may be a situation in which management is tossing everything out, including the kitchen sink. In other words, let's lower expectations to a level where any upside surprise will be a win. But a 25% decline in comps seems overdone, especially after posting 14% comp growth in the first quarter of 2012. I think management is discounting its own abilities here.
Still simmering or just right?
The guidance spooked investors, but not enough to scare off the Street entirely. The stock took a hit, but it didn't stay down for too long. Unfortunately, for those investors who were waiting patiently for a bargain, it's still not there. Yum! is a perfect example of how a good, expensive stock may get knocked down, but finds a way to get back up.
Although there may be some near-term headwinds that still have not been priced into the stock, it doesn't change the long-term value in this company. I still think McDonald's is the better value here, though. But should Yum! drop by another 7% to 10%, I will have to reconsider.
Fool contributor Richard Saintvilus has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill 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.