Yum! Brands Crashes: Buying Opportunity?

Source: Yum! Brands

Why Yum! Crashed➢ Yum! Brands reported lower-than-expected sales and earnings for the

second quarter. The stock crashed by 6.9% on Thursday in response.

➢ Falling sales in the U.S. was the main weak spot during the quarter. Industry giant McDonald’s is confirming that the whole industry is facing considerable challenges.

➢ On the other hand, the company is performing well in international markets, and Yum! Brands seems to be successfully turning the business around in China.

➢ Is the recent dip in Yum! Brands a buying opportunity for investors?

The Main Numbers➢ Total sales came in at $3.2 billion, a 10% annual increase, and lower

than analysts’ expectations of $3.25 billion.

➢ Worldwide system sales grew 6%. Worldwide restaurant margin increased 3% to 15.5% and operating profit increased 34%.

➢ Total international development was 298 new restaurants; 78% of this development occurred in emerging markets.

➢ Earnings per share came in at $0.73, a big increase of 21% versus the same quarter in the prior year, but marginally below analysts’ forecasts of $0.74 per share.

Ongoing Turnaround in China➢ China is a huge market for Yum! Brands, and the company seems to

be leaving behind the slowdown produced by controversy over its KFC poultry suppliers in 2013.

➢ Total China system sales increased 21% excluding currency translation. China system sales grew 25% at KFC and 16% at Pizza Hut Casual Dining.

➢ China same-store sales grew 15%, driven by growth of 21% at KFC. Pizza Hut Casual Dining same-store sales were even.

➢ Restaurant margin increased 6.2% to 16.8%; and operating profit in China jumped by an impressive 188%

China Restaurants

Source: Yum! Brands

KFC KFC division system sales increased 5% excluding foreign

currency translation. International system sales grew 12% in emerging markets and 6% in developed markets. U.S. system sales declined 4%.

International same-store sales grew 4% in emerging markets and 3% in developed markets. U.S. same-store sales declined 2%.

Operating profit excluding currency fluctuations increased 12%.

KFC Division opened 110 new international restaurants in 38 countries. This included 79 units in emerging markets.

KFC Weakness Was Concentrated in the U.S.

Source: Yum! Brands

Pizza Hut Pizza Hut division system sales decreased 1% excluding foreign currency

translation. International system sales grew 4% in emerging markets and declined 1% in developed markets. U.S. system sales decreased 2%.

International same-store sales were even in emerging markets and declined 2% in developed markets. U.S. same-store sales declined 4%.

Restaurant margin declined 6.4%, and operating profit declined 22%.

Pizza Hut division opened 109 new restaurants, including 67 international units and 42 U.S. units. This included 32 units in emerging markets.

Pizza Hut: Weak in Developed Markets

Source: Yum! Brands

Taco Bell Taco Bell division system sales increased 3%. U.S. same-store sales

grew 2%; this is quite a solid performance considering industry conditions.

Restaurant margin was 17.7%, a decline of 2.7%, driven by commodity inflation, investments in breakfast and sales deleverage in other dayparts.

Taco Bell Division opened 30 new restaurants; 29 of these new units were opened by franchisees.

India India system sales increased 18%, prior to foreign currency

translation, driven by a 25% unit growth.

Same-store sales declined 2%.

Operating loss was $1 million, an improvement of $3 million versus the second quarter of 2013.

Yum! Brands ended the quarter with 714 restaurants in India, a 25% annual increase. This includes 341 KFC restaurants, 182 Pizza Hut Casual Dining, and 186 Pizza Hut Home Service locations.

Problems at Home While Taco Bell is performing relatively well, weakness in Pizza Hut and

KFC in the U.S. is the main problem for Yum! Brands.

This seems to be an industrywide phenomenon due to factors such as market saturation, lackluster consumer spending, and the trend toward healthier nutrition.

McDonald's has been facing stagnant comparable sales in the U.S. over the last several months. Comparable sales in the U.S. declined 1.2% in the first five months of 2014 at McDonald’s.

For the month of May, McDonald’s reported a 1% decline in comparable sales in the U.S., so there is no turnaround in sight in the short term.

Foolish Takeaway Weakness in the U.S. was the main reason behind Yum! Brands’

disappointing performance in the second quarter. This is mostly due to challenging industry conditions.

International growth is quite solid, and the sustained turnaround in China is very encouraging.

The outlook seems remarkably strong: Management maintained its guidance for a big increase of 20% in earnings per share during 2014. The company expects double-digit earnings growth in 2015 and the following years.

Even if it’s hard to tell when things may turn for the better in the U.S., global growth opportunities could more than compensate for lackluster performance at home in the long term.

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