Feb. 3, 2014 was a good day for shareholders of Yum! Brands (YUM 0.81%). After the market closed, the parent company of Taco Bell, KFC, and Pizza Hut released earnings for the fourth quarter of its 2013 fiscal year. In response to a better-than-anticipated report, shares of the restaurant conglomerate rose over 4% in post-market trading. While Yum! Brands does continue to face competition from McDonald's (MCD 2.37%) this latest report may be just what investors have been waiting for.
Yum!'s results were reasonable but mixed
For the quarter, analysts expected the company to report revenue of $4.26 billion. Matching forecasts would have implied a top-line growth rate of 2.5% from the $4.15 billion that management reported in the fourth quarter of 2012. Unfortunately, revenue came in shy of estimates at $4.18 billion.
In its release, the company announced that comparable store sales fell 2% in the United States and 4% in China. This was, however, partially offset by a 2% rise in comparable store sales in the company's international segment (YRI segment) and by the addition of 1,952 new locations throughout the year.
Although the company fell short on revenue, it did perform far better on earnings. For the quarter, management reported adjusted earnings per share of $0.86. This was significantly higher than the $0.80 that analysts expected and slightly higher than the $0.83 the company earned in the fourth quarter of 2012. Excluding the adjustments and looking solely at GAAP earnings, the company saw its profitability decline from $0.72 last year to $0.70. The decline came about largely because of a $118 million loss incurred from the early extinguishment of $550 million in debt.
What does this mean for Yum!?
For the past few years, Yum!'s performance has been fairly impressive. Between 2009 and 2012, the company's revenue rose 26% from $10.8 billion to $13.6 billion. This came about from a combination of a greater number of locations opened, and a rise in comparable store sales. In 2012 alone, the business opened a record 1,976 restaurants and saw comparable store sales rise 4% in China, 3% in its YRI segment, and 5% in its U.S. operations.
Over the same timeframe, larger rival McDonald's (MCD 2.37%) grew its sales at a slightly less impressive 21% from $22.7 billion to $27.6 billion. Just as in the case of Yum!, McDonald's grew through a combination of additional locations and comparable store sales. In 2012, for instance, the business saw comparable store sales climb 3.1% while management added on 970 locations.
Despite the growth seen in both of these companies, though, they were negatively affected starting in 2013 by the success of competitors like Chipotle Mexican Grill and Panera Bread. In the third quarter of 2013, revenue at Yum! declined 3% from $3.6 billion to $3.5 billion. Looking at profitability, the situation was even worse.
In the third quarter of 2013, the company's net income came in at $152 million; this was 68% lower than the $471 million reported in the same quarter a year earlier. In all fairness, this was also attributable to the company's writedown of its Little Sheep acquisition in China. Even removing all impairment charges would have resulted in a 32% falloff in profitability, however.
Like Yum!, McDonald's was affected throughout 2013 but to nowhere near the extent of its peer. In its third quarter, the world's largest restaurant chain saw revenue rise only 2%. Even though the company added to its store count, it was hit by mediocre comparable store sales. During the quarter, the company's comparable store sales growth came in at 0.9%, a full percent below what it earned the same quarter a year earlier.
Foolish takeaway
Much to the surprise of its shareholders, Yum!'s management was able to release a report that had some disappointment to it but was still well received. Yes, revenue did fall short of expectations and the company's GAAP earnings per share came in lower than its previous year. Normally, this would be bad news. Given the well-reasoned adjustments made to Yum!'s bottom line, however, the company came out more profitable than initially anticipated.
Moving forward, it's challenging to know what will become of Yum!. If recent performance is any indication, the business will continue to shrink within the United States and expand in international regions like India. This paradigm shift will likely imply lower margins, but the company's growth prospects could prove promising for the Foolish investor if management doesn't make too many mistakes along the way.
