The fast-food industry is facing several hiccups as the people of America are becoming more and more health conscious. YUM! Brands, Inc. (YUM) also faced the same. 2013 was worse for YUM as there were chicken issues in China.
This Louisville, Kentucky-based company operates or licenses Taco Bell, KFC, Pizza Hut and WingStreet restaurants worldwide. YUM operates in six segments: YUM Restaurants China (China or China Division), YUM Restaurants International (YRI or International Division), Taco Bell US, KFC US, Pizza Hut US, and YUM Restaurants India (India or India Division). The China Division includes mainland China, and the India Division includes India, Bangladesh, Mauritius, Nepal, and Sri Lanka. YRI includes the remainder of its international operations.
Tracking the Performance
On April 22, 2014, YUM reported results for the first quarter ended March 22, 2014, beating earnings estimates. The company’s adjusted earnings of 87 cents per share beat the year-ago quarter earnings of 70 cents by 24.3%. Worldwide system sales grew 4%, and the worldwide restaurant margin increased 3.3 percentage points to 19.2% and worldwide operating profit increased 22%. The company’s total international development was 249 new restaurants; 86% of this development occurred in emerging markets. KFC Division system sales increased 4%, driven by 2% unit growth and 1% same-store sales growth. Restaurant margin decreased 0.3 percentage points to 12.9%. Operating profit increased 4%. Pizza Hut Division system sales were even, as 2% unit growth was offset by a 2% same-store sales decline. Restaurant margin decreased 4.2 percentage points to 10.8%. Operating profit decreased 14%. Taco Bell Division system sales were even, as 1% unit growth was offset by a 1% same-store sales decline. Restaurant margin decreased 2.6 percentage points to 15.6% and operating profit decreased 16%. YUM’s worldwide effective tax rate, prior to Special Items, decreased to 25.8% from 26.0%.
The company has restructured its business divisions effective this quarter. Its YUM Restaurants International (YRI) and the U.S. geographic divisions have been merged to create three separate brands based divisions— KFC, Pizza Hut and Taco Bell. However, the company will continue to operate its other two divisions — YUM Restaurants China and YUM Restaurants India separately. Further, according to Nation's Restaurant News, YUM will launch a "fast-casual taco" restaurant this summer, featuring premium tacos. Recently, it also launched breakfast at all the Taco Bell divisions. Other than China, YUM expects to open 1,250 international units mainly in the emerging markets. The company recently launched breakfast at all the Taco Bell divisions.
China at a Glance
For the quarter, the China Division system sales increased 17%, driven by 7% unit growth and 9% same-store sales growth. Restaurant margin increased 6.8 percentage points to 23.4%. Operating profit increased 80%.
After facing several hiccups due to chicken issues in China, this leading restaurateur has modified its KFC brand in China, as China is one of the key contributors to YUM’s revenues over the years. The company recently introduced a new menu for its 4,600 KFC restaurants across 900 cities and innovative marketing strategies aimed at improving brand awareness and traffic. YUM expects to open at least 700 new restaurants in China in 2014.
India Holds Huge Potential
YUM sees a lot of potential in India, as it has the sixth-highest consumption of poultry in the world. For this reason, KFC has become much popular among Indian people. Since KFC first entered India in the1990s, YUM India has grown to 733 restaurants as of Q4 2013 – approximately 25% are company-owned and 75% are franchises. Pizza Hut has also built a great reputation in India, and has been named the No. 1 most trusted food-service brand seven years in a row. YUM is also introducing Taco Bell to the Indian market. There are only four locations in the city of Bangalore. YUM aims to invest $100 million in the Indian market over the next three to four years, and plans to have more than 2,000 locations by 2020.
For the quarter, India Division system sales increased 21%, driven by 25% unit growth, which was partially offset by a 1% same-store sales decline. Operating profit declined $1 million.
Head to Head
In this fast-food industry, YUM faces competition from McDonald’s (MCD). Health consciousness amongst the people has given a serious threat to this Oak Brook based company, as McDonald’s is heavily exposed to the US market. Other threats include poor product positioning. Further, YUM is way ahead of McDonald’s in the emerging markets.
Charts from company website
On a Concluding Note
The company’s strengths can be seen in multiple areas such as a growing consumer class, 40,000+ assets with capacity to grow, attacking sales layers across all day-parts, strong franchise driven business model (approaching $2 Billion in franchise fees), reliable cash generating machine, industry leader in ROIC, famous recognition culture, and last but not the least muscle building organization. Further, its strong global position (40,000+ restaurants in 125+ countries) will help to earn more profits amid this tough situation. Therefore, I am pretty bullish that this company (ranked 201 on the Fortune 500 List) won’t let its customers as well as valued investors down in the long run.