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Can Yum! Brands Keep Growing Despite China's Woes?

By Dan Caplinger - Apr 21, 2013 at 3:40PM

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Slower growth and the avian flu scare are combining to hurt the company.

On Tuesday, Yum! Brands (YUM 1.71%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

Yum! is the company behind popular restaurant chains KFC, Pizza Hut, and Taco Bell, and as a fast-food giant, Yum! has sought to expand beyond the borders of the U.S. to tap into the huge growth potential in emerging markets. But that expansion has brought with it some challenges that the company has had to address. Let's take an early look at what's been happening with Yum! over the past quarter and what we're likely to see in its quarterly report.

Stats on Yum!

Analyst EPS Estimate

$0.61

Change From Year-Ago EPS

(36%)

Revenue Estimate

$2.56 billion

Change From Year-Ago Revenue

(6.6%)

Earnings Beats in Past 4 Quarters

2

Source: S&P Capital IQ.

Will Yum!'s earnings get yummier this quarter?
Analysts in recent months have gotten a lot more troubled about Yum!'s earnings prospects. They've cut their views on the full 2013 year by $0.55 per share, reflecting concerns about flagging sales. The stock has been stuck in a holding pattern, falling about 1.5% since mid-January.

Unfortunately, the biggest news for Yum! this quarter has been bad. An outbreak of avian flu in China has resulted in fewer customers venturing out to Yum!'s eateries in the emerging-market nation. With KFC and its other restaurants in China accounting for more than half of the company's overall sales, Yum! has already warned that the outbreak has affected its results, with same-store sales in China down a whopping 13% in March on a 16% drop at KFC. McDonald's (MCD 1.52%) has seen some negative impact as well, but its smaller footprint in China and its less extensive reliance on chicken products has helped it avoid the full brunt of the declines. Despite Yum!'s efforts to educate consumers about its food's safety, China could keep hitting Yum!'s results for some time.

One source of strength for Yum! has been Taco Bell, which has done a good job of standing up to rivals in the Mexican food space. Some even see the unit as positioning itself to compete directly against Chipotle Mexican Grill (CMG 4.59%), although Chipotle's price points and targeted customer focus are quite a bit different from Taco Bell's. By reconnecting with former parent PepsiCo (PEP 0.98%) through its Doritos Locos Tacos offerings, Yum! has tapped into the popular Doritos brand, helping both companies.

In Yum!'s earnings report, pay close attention to the latest in the company's efforts to do damage control in China. With so much riding on its Chinese business, Yum! needs to find ways to successfully bring customers back into KFC in order to stem longer-term damage there.

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Stocks Mentioned

Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$119.77 (1.71%) $2.01
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$251.87 (1.52%) $3.78
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,402.42 (4.59%) $61.51
Pepsico, Inc. Stock Quote
Pepsico, Inc.
PEP
$171.77 (0.98%) $1.66

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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