Is Yum! Brands Looking Yummy?

Despite its problems over the past year, shares of Yum! Brands inched up after news broke of better-than-expected earnings. Does Yum! still have plenty of room to run or should investors take a bite out of McDonald's instead?

Daniel Jones
Daniel Jones
Apr 28, 2014 at 10:18AM
Consumer Goods

Source: Yum! Brands. 

After the company reported mixed results for the first quarter of its 2014 fiscal year, shares of Yum! Brands (NYSE:YUM) rose 1% on April 25 while the S&P 500 fell almost 1% for the day. Even though the business failed to meet analysts' expectations for revenue growth, its earnings were more than enough to encourage investors to pile in. Is this finally the end of Yum!'s recent troubles or is the business still likely to face competitive pressure from rival McDonald's (NYSE:MCD)?

Yum! couldn't cut it on revenue but it more than made up for its shortfall
For the quarter, Yum! reported revenue of $2.72 billion. This represents a 7% gain from the $2.54 billion that it reported in its year-ago quarter, but it fell shy of the $2.80 billion that Mr. Market hoped to see. In its release, the company attributed the rise in sales to two things; comparable-store sales growth and an increased store count.

During the quarter, Yum! added 249 new locations globally. Of these, approximately 86% were located in emerging markets. In addition to a higher store count, management chalked up the company's higher revenue to increased comparable-store sales, mostly in its China division, which saw its sales increase 9% from the year-ago period.

 Metric Last Year's Estimate Actual
Revenue $2.54 billion $2.80 billion $2.72 billion
EPS $0.72 $0.85 $0.87

Source: Yahoo! Finance and Yum! Brands.

In terms of revenue, Yum! didn't do terribly but it could have done better. The same cannot be said of the company's profitability. For the quarter, the business reported earnings per share of $0.87. In addition to being 21% greater than the EPS of $0.72 that the company enjoyed in its first quarter of 2013, the jump in profits was $0.02 greater than analysts anticipated.

On top of benefiting from higher revenue, Yum!'s bottom line increased because of decreases in some of its costs. Chief among these were the business's selling, general, and administrative expenses, which fell from 10.8% of sales to 9.9%. Over the same period, Yum! also reported that its payroll and employee benefits expenses dropped from 19.3% of sales to 18.1%.

Source: Wikimedia Commons.

Is Yum! as tasty as McDonald's?
Currently, Yum!'s largest competitor is, by far, McDonald's. With a market cap of $98 billion, McDonald's is nearly three times the size of Yum! and it has the revenue to prove it. In its most recent quarter, the company reported sales of $6.70 billion, about two-and-a-half times more than Yum!'s figure. However, how has each company performed over an extended period?

MCD Revenue (Annual) Chart

MCD Revenue (Annual) data by YCharts.

Over the past five years, McDonald's has seen its revenue jump 24%, from $22.7 billion to $28.1 billion. This is a nice clip above the 21% increase in revenue reported by Yum!, which saw its top line rise from $10.8 billion to $13.1 billion over the same time frame.

Excluding 2013, when Yum!'s revenue fell 4% largely because of a 13% drop in comparable-store sales in China, the business's revenue has actually risen 26% since 2009, while McDonald's revenue rose 21% over the same time frame. This decrease in revenue stemmed largely from scares over the avian flu and the potential impact that could have on the company's chicken supply. During that period, McDonald's also saw its revenue negatively affected by the avian flu, as evidenced by the 1.9% drop in comparable store sales in the company's Asia/Pacific, Middle East, and Africa (APMEA) segment (the closest comparable segment the company has to Yum!'s China operations).

From a profitability perspective, McDonald's has done even better when stacked up against Yum!. Between 2009 and 2013, the fast-food giant saw its revenue climb 23%, from $4.6 billion to $5.6 billion. For the most part, the increases in revenue were accompanied by costs that remained in line on a percentage-of-sales basis.

MCD Net Income (Annual) Chart

MCD Net Income (Annual) data by YCharts.

Yum! hasn't been so lucky. Even though the company reported a 49% jump in profits between 2009 and 2012, the 32% drop in net income during 2013 left its profits essentially level at $1.1 billion for the five-year period. While the revenue gain helped the company's bottom line, this was more than offset by an impairment of the company's Little Sheep acquisition in China, combined with higher interest expenses and a step up in the company's effective tax rate.

Foolish takeaway
Based on the data provided, it looks like Yum! had a mixed but generally good quarter. Yes, the company did miss on sales, but it made up for this by posting higher-than-anticipated earnings. However, this one earnings beat does not mean that the business is a slam-dunk. Because of its poor performance in China over the past year, the company's growth metrics were lower than those of McDonald's, but these operations appear to be recovering nicely.

If management can improve the company's China segment further, it's likely that Yum! could be an attractive prospect for the Foolish investor. However, it's important to note that McDonald's, despite its larger size, has stayed toe-to-toe with the fast-food conglomerate. For investors who prefer larger businesses, McDonald's might make for a more appealing prospect.