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Yum! Brands, Inc. Profits Tumble, but Revenue Creeps Higher

By Isaac Pino, CPA – Feb 3, 2014 at 5:40PM

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A food scare in China cut profits at Yum! Brands, but the company's on a road to recovery.

The past year or so at global restaurant chain Yum! Brands (YUM -0.32%) proved challenging -- to say the least -- but the worst might be over for shareholders.

After posting double-digit growth in earnings per share in six of the past seven years, the company's growth took a nosedive in 2013. Several food safety and health issues scarred the company's reputation across its KFC China restaurants in December 2012, and the road to recovery has been slow. Perhaps no chart summarizes Yum! Brands fall from grace better than the following:

Despite years of steady earnings growth, the bottom fell out of the bucket of chicken in 2013 while Yum! grappled with the KFC China food scare. Contributing to the 30% decline in earnings per share was Yum!'s consistently declining same-store sales, a key metric for restaurant chains. For the fourth quarter and year ended Dec. 28, Yum!'s same-store sales shrank 4% and 13%, respectively. In particular, same-store sales in China declined 13% year over year.

Still, investors can take comfort in knowing that Yum! has weathered this storm quite impressively overall. Shares of Yum! are practically unchanged since the incident occurred in December 2012, hovering around $67. In the latest quarter, Yum! also impressed analysts by posting earnings per share of $0.86 versus a consensus estimate of $0.80. As a result, the market responded favorably to Yum!'s latest results during after-market trading, bidding the stock up 4.5%. We'll find out tomorrow following the company's conference call whether the enthusiasm will last.

For now, investors have a few reasons to be optimistic about Yum!'s ongoing recovery. Despite the fallout in the critical China market, Yum! managed to deliver 2% and 3% revenue growth the quarter and year, respectively. Further, the company sees such tremendous opportunity in markets like China and India that growth is expected to be robust once consumers' worst fears have subsided.

And Yum!'s been hard at work trying to clean up operations to change the negative consumer sentiment. Last quarter, CEO David Novak had the following to say about Yum!'s progress:

I have always said that no two crises are the same, and we always said that we would need the gift of time and that it would take at least nine to 12 months. So far it is nine months and counting and not happening as fast as we had hoped.

This quarter, the tone from seems to be more upbeat from Novak:

With the decisive actions we've taken to strengthen our company across the board, we are well positioned to deliver double-digit EPS growth in 2014 and the years ahead.

Of course, Yum!'s comparisons will be lower in 2014, making for an easier hurdle. Likewise, it's hard to commend the company for its latest results when other chains, such as Chipotle Mexican Grill, are posting stellar same-store sales growth of 9.3%. Nevertheless, the last year's been a tough one to digest for shareholders, and it looks like there's light at the end of the tunnel for Yum! Brands.

Source: Yum! Brands.

Isaac Pino, CPA, owns shares of Chipotle Mexican Grill. The Motley Fool recommends and owns shares of Chipotle Mexican Grill. We Fools don't 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.

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