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Shares of Yum! Brands Look Even More Delicious Now

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

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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.

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