Yum! Brands' Bag of Mixed Results

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Mar 12, 2015
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Yum! Brands (YUM, Financial) is one of the leading quick service restaurant chains. Its most popular outlets are KFC, Pizza Hut and Taco Bell. However, this company is undergoing a tough time, as increased competition and food safety scandal in China have made customers move away from the retailer.

Thus, its fourth quarter results were mixed, as strength in some of the segments was offset by weaknesses of the other. The top line was ahead of the estimates, whereas the bottom line missed the mark. Nonetheless, investors were content with the results, resulting in a sharp increase in its share price.

An overview

Although revenue for the quarter dropped 4% to $4 billion, over last year, it was ahead of the analysts’ estimate of $3.97 billion. The key factors which played an important role during the period were weakness in the Chinese market, stagnating U.S. market and growing demand for Taco Bell’s breakfast. Sales at KFC and Taco Bell surged during the quarter, helping the top line grow.

Revenue from the KFC division grew 7% during the quarter along with the same store sales growth of 4%. Revenue was driven by growth in both Russia and Europe. Russia registered a growth of 39% and Europe surged 14%, over last year.

Even Taco Bell registered a growth of 9% during the period. It was one of the bright spots in the U.S., as comps increased 3%for the quarter. Same store sales at Taco Bell, on a global basis, jumped 6%, driven by growth in the breakfast segment and an expanded menu of offerings. New breakfast items such as burritos, egg and meat filled waffle tacos and crunch wraps, attracted customers. Breakfast segment has grown so much that it now makes 6% of Taco Bell’s revenue.

However, the bottom line of the company plunged to $0.61 per share as compared to $0.86 per share last year. Analysts were expecting it to be at $0.66 per share.

China woes

Yum Brands’ operations in China are suffering the most mainly due to the food scandal in the region, which has scared customers away from its restaurants, especially KFC. China makes more than half of its revenue. Therefore, weakness in this segment affects the top line.

Sales in China fell 11% during the quarter as same store sales dropped 16%. However, the analysts’ estimate was at 19.4%. Thus, its results were better than expected, showing signs of recovery.

Some efforts to look forward

Yum! Brands is now making a number of efforts to grow its business and attract maximum customers possible. Since sales at Pizza Hut were not up to the mark, the company added a number of new items, such as 11 new regular pizzas and 5 skinny size pizzas to its list of offerings. Also, less calorie pizza, healthier new items and sleeker packaging should help attract customers.

Further, it plans to add more new products later this year, in its breakfast segment. For instance, it plans to expand the new Cantina Power Breakfast platform to new regions. The Cantina Power Breakfast menu offers a steak burrito, vanilla flavored Greek yogurt and a steak bowl.

Also, the company plans to open 2100 new stores in 2015. This is in addition to the 2000 stores opened last year. Thus, Yum! Brands is expected to grow in the future.

The bottom line

Yum! Brands’ improving results in China was quite a relief. Its rebranding and marketing efforts have been pretty impressive. Also, the introduction of new products should help in luring customers. It also provides a dividend yield of 2.2% for its investors. However, falling sales in China and India and stagnation in the U.S. market is a matter of concern. Thus, one should be cautious before investing into this food provider.