Please ensure Javascript is enabled for purposes of website accessibility

Shares of Yum! Brands Look Even More Delicious Now

By Steve Symington - Apr 24, 2013 at 5:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Yum! Brands is up 7% despite lower year-over-year earnings. What gives?

Shares of Taco Bell and KFC operator Yum! Brands (YUM 1.70%) are trading up more than 7% today after the company posted an 8% decline in year-over-year earnings per share during its most recent quarter.

Wait, what?!
How, you ask, could lower earnings be considered a good thing?

You'd better loosen your belts, Fools, because we're going to go in and find out.

For the quarter, total revenue fell around 8% year over year to $2.535 billion, largely hurt by a 20% drop in same-store sales from the crucial China market, where Yum! currently operates 5,480 restaurants. One bright side, however, lies in total same-store sales at Yum! Restaurants International, which somehow managed to eke out a 1% gain. What's more, comps in the company's already-massive U.S. market gained a reasonable 2%.

Unsurprisingly, then, operating profit in the China division fell 41%, but rose in the U.S and at Yum! Restaurants International by 5% and 19%, respectively.

KFC in China. Source: Wikimedia Commons.

The wonders of proper disclosure
To be fair, less than two weeks ago I highlighted Yum!'s latest China woes as reports of Avian flu had devastated KFC sales in the region. Even though the bug doesn't actually affect the safety of properly cooked food, Chinese consumers fled en masse from KFC, as they were already gun-shy following reports of tainted chicken from former Yum! Brands and McDonald's supplier New Hope Liuhe.

Of course, both Yum! and Mickey D's immediately stopped using the supplier and promised stricter oversight in the future, but Yum! was hit especially hard because it operates nearly three times as many restaurants in the country as McDonald's.

In the end, Yum! did everything right by educating and reassuring consumers about food safety, then properly warned investors ahead of time of a potential shortfall in profits.

After today's announcement, it's clear Yum! Brands erred on the side of caution and treated investors to a classic demonstration of "underpromise and overdeliver." As I wrote two weeks ago, the company "knows a thing or two about weathering these sorts of storms, and is intelligently doing everything in its power to show its food is worth consumers' money."

Incidentally, that's also why Yum! was able to comfortably continue its rapid international expansion despite the difficulties. When all was said and done, Yum! opened 380 new restaurants over the past three months, with a full 88% of them located in bustling emerging markets like India.

Finally, because Yum! Brands expects its China difficulties to persist, the company has also promised to temporarily provide monthly same-stores sales releases until sales have recovered.

Foolish final thoughts
In the end, you've got to applaud Yum! for its relative transparency in keeping investors so closely in the loop. And that, my friends, is exactly the type of Foolish behavior I love to see in my investments.

As a result, I think shares of Yum! Brands still look tasty even after today's pop.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
$113.82 (1.70%) $1.90

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.