Yum!’s Earnings Expected to Fall, But Future Outlook Better
The company has been consistently witnessing decline in revenue in the past three quarters. Yum and other Westerners including McDonald’s (NYSE:MCD) and Burger King (NYSE:BKW) were accused of using chicken with excess level of antibiotics in China. The food regulatory agency conducted tests in December and found samples containing unacceptable level of antibiotic.
This particularly damaged Yum’s image as it has a vast presence in the mainland. The company, hit by the chicken scam, suffered a 5% drop in net income in the fourth quarter last year, followed by 26% plunge in the first quarter and 40% in the second quarter of the year. Even the revenue of the company has been falling in the last two quarters. First quarter suffered 8% drop and the second quarter witnessed 19% decline in revenue to $2.9 billion compared to prior year comparable period due to the issues faced in China, which happens to be Yum!’s biggest overseas market.
Yum’s primarily runs four business segments: Yum China, United States division, Yum Restaurant India, Yum Restaurant International. Out of these four, China forms the most importatant unit as it contributes a major chunk towards the revenue of the company. In 2012, over 50% of Yum’s revenue came from the mainland.
Even archrival McDonald’s delivered softer results in the last quarter. However, both the American companies are expected to rebound in the long run.
On a Positive Note
Although Yum! expects to record $0.93 per share, this is the best that the restaurant giant has earned since the third quarter of 2012 when it recorded $0.99 earnings per share. Moreover, even if earnings look a bit weak, the company has always thrashed analyst estimates by posting better than expected figures. China sales have been adversely affecting Yum!’s overall revenue and profit growth after the poultry supply issue.
Though Yum! immediately cut ties with suppliers suspected or found out to be supplying chicken with inappropriate levels of antibiotic, yet it faced severe consequences in the form of loss of customer confidence.
Yum’s U.S. market has not been as good as its international market. In fact McDonald’s is more popular in the domestic market. Moreover the economic downturn also damaged company results. However, with the rebound in the U.S. economy, increasing consumer confidence and improving employment rates, the restaurant industry is expected to grow. For an overall growth, a restaurant chain however needs global expansion and work on cost cutting techniques instead of focus on one market. As per National Restaurant Association, the capital spending of restaurant chains are also estimated to rise in future.
Yum Brands and fellow rivals McDonald’s and Burger King are facing increasing cost due to rise in food prices. Additionally, healthcare reforms are also adding to the cost of operations. But conditions for quick service restaurant chains are forecast to remain positive. Yum!’s poor performance not only came from slow growth in China, but the growth rate in European zone is also tumbling since 2010. However, 2013 has been a relatively better year in food retail sales in the European market. If the market continues to improve at the current pace in Europe, then Yum! is set to witness a turnaround and post higher margins due to its remarkable exposure in the continent.
To Sum Up
The rebound in the domestic market and better expectations from the mainland, Yum is expected to revive in the near future. There is huge potential in the stock. Further, its expansion plan to explore new emerging markets including Africa, India, Russia, and France is going to strengthen the company’s future growth prospects.