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This Fast Food Giant Doesn’t Look Yummy
Posted by: abirk (IP Logged)
Date: October 28, 2013 10:23AM

Yum! Brands Inc. (YUM) posted a weak third quarter earnings report recently. The ongoing problems in China are not going to die down soon. Recovery in this region may take longer than what is anticipated . Unfortunately, Yum!'s comparable-same store sales haven't improved over the previous month's number, and casts doubt on investors' hopes that the worst was over for Yum! in China, where it operates around 6,000 restaurants and collects a whopping 40% of its profit.

Dismal Figures


It generated third quarter revenues of $3.47 billion. Net income fell by 68% to just $152 million. New restaurant openings marked some growth. KFC reported a 13% decline in sales, while Pizza Hut sales grew by 6%. The owner of Taco Bell, KFC, and Pizza Hut trades at 28 times trailing earnings and 18 times forward earnings, which is way too expensive for a company posting sequential sales declines.

The company gets about 50% of its revenue from China, where it is finding it hard to sustain follows a slower economy. Taco Bell U.S. and China division, YRI currently represents 85% of the company's operating margins. Revenues in the China division decreased by 12%, owing to the avian flu turmoil. Operating margins also decreased by 1.50% resulting from increased operating expenses as a percentage of sales. Net margins decreased significantly during the second quarter of fiscal year 2013 when compared to the second quarter of last year. The CAGR of the company is at 8% which is lower than the industry average of 9.50%. These figures certainly don’t go in favor of the company for the time being.

Competitors

Yum Brands faces stiff competition from McDonald's Corporation (MCD) whose operating earnings rose by 5.6% to $2.42 billion in the third quarter. Diluted earnings per share and net earnings rose by 6.3% and 4.6% respectively. Tight expense control drove the revenues from company-owned restaurants and franchised stores by 1.8% and 3.7% respectively. Total debt stood at $13.37 billion, for a net debt position of $11.1 billion.

Another close competitor of YUM is Chipotle Mexican Grill Inc. (CMG). The company currently owns 1,502 restaurants of which 1,490 are in the U.S., five in Canada, six in London and one in Paris. Chipotle is comparatively expensive when compared to YUM. Opening a Chipotle in lower-income areas cannot provide the same returns as opening up a McDonald's in the same area. Its P/E ratio is also much higher than the industry average.

The Wendy's Co (WEN) also poses potential threat to the company. It is making up its restaurants in a big way, and has also strengthened its value proposition by adding over $1 billion in market capitalization already. It is the world's third largest quick-service hamburger company. The Wendy's system includes more than 6,500 franchises and company restaurants in the U.S., and 27 countries and U.S. territories worldwide.

Burger King Worldwide Inc. (BKW) is also giving a tough competition to these companies. The company is offering premium items like Rib Sandwich, Carolina BBQ Favorites, Turkey Burger, Buffalo Chicken Strips and more. It is modernizing its restaurants in order to improve its brand perception. It has added premium menu options and gourmet coffees, renovated restaurants and overhauled its advertising campaign.

Entry Into India: Can It Change the Scene?

Taco Bell is one of the flagship properties of Yum Brands, the company that has perpetrated KFC and Pizza Hut upon India with so much success. In a few short months, they’ll open their first Taco Bell in Bangalore. For many Indians, this will be their first experience with Mexican food. Taco Bell will be introduced in India because of a large demographic of young people with rising in income levels and international exposure. Chains like Costa Coffee, The Coffee Bean, and Tea Leaf have opened stores in India giving a rise in the coffee shop culture in the country. This decision of Yum! seems to be favorable since the Indian government is pushing for more foreign investment in the country .

On a Concluding Note

As people continue to move toward a healthier lifestyle, fast food companies continue to face a variety of criticisms, and have been forced to rethink their business models. Recently, each of these companies has begun offering healthier options. Yum Brands is a solid company overall. The global slowdown is certainly making its effects known, but the fast-food giant has solid fundamentals and improving technicals. It is one of the most respected global brands, even despite its current problems.

It is surely among the best breeds in the fast food industry. Calendar year 2014 must provide some payouts to shareholders in the form of share repurchases and dividends. The situation will change and it is expected that the restaurant industry will expand globally. The company also plans to take exposure in new markets including India, France, Germany, Russia and across Africa. To offset the challenging economic environment, the company continues to work to optimize the menu, modernize consumer experiences and broaden accessibility.


Stocks Discussed: YUM, MCD, CMG, WEN, BKW,
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