Last year was certainly a tough year for Yum! Brands (YUM 0.48%). The problems started in December 2012 at KFC in China over issues with one of its poultry suppliers. Things steadily deteriorated as worries over bird flu cropped up again and drove customers from its stores. The company posted double-digit drops in comparable store sales within the People's Republic of China. However, things are starting to look up and this Fool sees the light at the end of the tunnel for Yum! Brands and its shareholders. Now is the time for us fools to be looking ahead and see what's in store for 2014.
Sales in China showing signs of improvement
KFC's China business is critical for Yum! Brands. Yum! Brands has more than 6,000 restaurants in more than 850 cities in China. So when there's a problem in China, it has a huge impact on the top- and bottom-lines for Yum! Brands.
In November, same-store sales for Yum! China posted a 1% gain. This was a positive sign since September and October same store sales comparisons to the previous year were negative. Part of the reason for this turnaround was due to promotions that the company ran. Now all eyes will be watching to see how sales fared in December. Citi believes that KFC China will post back-to-back positive same-store sales for December when the company reports its results.
For 2014, Yum! forecasts operating profits to grow 40% in the China Division. The company plans to open 1,850 new restaurants next year, of which 700 will be in China.
Plenty of potential in India
One country that has Yum! Brands extremely excited is India. There, the company sees a lot of potential for all three of its restaurant concepts. I touched on a lot of the positive developments going on for Yum! in India with "Forget China, the Real Potential for Yum! Brands is in India".
Yum! Brands already has about 730 locations in India. When Yum! opened its 40,000th location, the company chose to make a symbolic move by opening the location in Goa, India. Pizza Hut has a growing presence as well with about 181 casual-dining restaurants and 132 home-delivery locations in India. Taco Bell has the smallest presence with only four locations in and around Bangalore. Overall, Yum! plans to have more than 2,000 locations by 2020.
Breakfast from Taco Bell launches this year
In a direct challenge to McDonald's (MCD 0.63%), Taco Bell is launching its new breakfast menu this year. It will include favorites like the waffle taco, Cinnabon Delights, and plenty of different burritos. Yum! Brands CEO David Novak is certainly excited about breakfast since he said on the company's earnings call that "the good news is that based upon our extensive market test, 90% of the breakfast sales are incremental, and it looks like the breakfast advertising is also driving total brand sales."
There's plenty of growth opportunities ahead for Taco Bell since 99% of its locations are in the U.S. Therefore, international expansion is definitely in the cards. By 2022, Yum! Brands hopes to double Taco Bell's sales to $14 billion from $7 billion today. This year, Taco Bell will open about 190 new restaurants and the plan is for more than 200 next year.
Competition with McDonald's is fierce
In terms of size and scale, Yum! Brands and McDonald's are intense competitors. Each one continues to try and top the other one. In Asia, McDonald's even offers chicken on its menus to go up against KFC, where each company typically has locations across from one another. I talked about their rivalry in "McDonald's and KFC Are Going Head-To-Head".
Both companies are also competing for our investment dollars. Yum! Brands trades at 20 times next year's earnings, while McDonald's trades at only 16 times next year's earnings. In terms of dividends, McDonald's wins here as well with its richer 3.3% dividend yield. But where Yum! gets the edge is in growth potential. Yum! Brands has three concepts that it can expand, while McDonald's has only one.
The year 2013 was a rough one for both Yum! Brands and McDonald's. However, in a competition between the two right now, I would give the edge to Yum! Brands. I see things turning around for the company in China and I think the new breakfast menu from Taco Bell will really spark same-store sales. Both the menu and the shares of Yum! Brands look appetizing to me.