Are Yum!, McDonald’s, and Starbucks Good Investments?

Yum!, McDonald’s, and Starbucks have done relatively well in a difficult consumer spending environment, but will their latest moves help them become better investments? Let's take a look.

Neeta Seth
Neeta Seth
Apr 11, 2014 at 7:00AM
Consumer Goods

A look at Blackbox International data shows that consumers aren't spending freely when it comes to eating out. The year continues to be plagued with a decline in same-store sales, or comps. The month of February witnessed a 0.7% decline in comps as compared to a 0.9% decline in January. February's decline was on top of a 5% decline in the same month a year ago. Even same-store traffic declined 3.2% in February, the second worst growth rate in the last 12 months.

However, fast-food outlets have been doing relatively better as compared to other businesses in the restaurant industry. The major tailwinds working in their favor are a growing millennial population, job pressure leading to paucity of time, and relatively cheaper and quicker servings at fast-food outlets.

Within these trends in mind, let's take a look at Yum! Brands (NYSE:YUM) and see how it compares with McDonald's (NYSE:MCD) and Starbucks (NASDAQ:SBUX).

Yum! trying for a turnaround
A choppy economy has been an issue for Yum! Brands. Its fourth-quarter results were a mixed bag, as it failed to match analysts' estimates on the top line due to its China woes. The China business first came under the scanner in December 2012 due to allegations regarding the quality of chicken  supplied to its KFC restaurants. This was followed by an outbreak of the avian flu  in China in April 2013. These two incidences hurt regional sales, and the negativity has continued.

The two largest contributors to Yum!'s top line, China and the United States, have been consistently delivering weak numbers. Consequently, during the fourth quarter, Yum!'s top line grew a meager 1% year over year to approximately $4.2 billion. However, earnings grew 4% year over year to $0.86 per share from $0.83 in the year-ago quarter. The earnings growth was on the back of robust performance of the Yum! Restaurants International business and higher worldwide operating profit results. This shows that the company is slowly recovering from the phase of bad performances.

KFC was named the No. 1 foreign brand in China in 2013, as per British Broadcasting Corporation, or BBC. In 2013, it opened 428 new KFCs in China and has the largest home-delivery business in the country. Yum! is focusing on reviving its past glory in China. It is working on an aggressive strategy and hopes to bounce back strongly in fiscal 2014.

Yum! announced an aggressive strategy in February. The twofold strategy includes introducing new menu items and aggressive marketing initiatives for brand promotion.

On the marketing front, it is focusing on redesigned product packaging, the roll-out of a new store design, and digital initiatives including a new mobile app, an e-menu, and a prepay take-out option. In addition, Chinese celebrities will be promoting its menu. Yum! is confident that these initiatives will draw more customers and fuel top-line growth going forward as well as enable it to achieve its target of 20% earnings-per-share growth.

McDonald's and Starbucks: On a similar path
McDonald's has been witnessing a gradual decline in its top and bottom lines, and fiscal 2013 was a challenging year in the company's own assessment. The company predicted flat comps for January during its earnings call but managed to register 1.2% growth. However, comps were down 0.3% on the back of weak numbers in the U.S. and Asia Pacific, the Middle East, and Africa (APMEA) regions; performance was offset by partially positive comps growth in Europe.

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For 2014, it is focusing on menu and marketing strategies, similar to Yum! Brands. For example, its recent innovations like "Dollar Menu and More" are intended to fuel customer traffic growth by offering greater value and variety without losing focus on increasing restaurant profitability. It is also enhancing the breakfast experience by creating a coffee culture through high-quality McCafe products.

In coffee, any discussion would be incomplete without the mention of Starbucks. The company's shares have lost around 5% in the last six months, as shown in the chart below. This could be a good opportunity for long-term investors who have stayed on the sidelines so far.

YUM Chart

Yum! data by YCharts

Coffee is a bustling industry in the U.S.; close to 34% of Americans get coffee outside the home at premium places like Starbucks, Coffee Bean, etc. In 2014, Starbucks plans to open a total of 750 new stores across China and Asia Pacific to drive top-line growth. Starbucks also offers an experience that cannot be replicated, and this is one of the growth catalysts going forward as it expands its footprint globally.

Bottom line
Hence, all three companies are focusing on expanding their presence in growth markets and are also innovating their menus. Yum! is gunning for a turnaround in its key markets, while McDonald's is looking to improve its business this year by rolling out menu items that should drive higher traffic. Starbucks continues to expand in Asia and expects this market to be a key growth driver in the future. Thus, investors can definitely look at these three companies, as they are outperforming the industry and trying to improve.