The people of America are becoming more and more health conscious as obesity is growing at a great pace. Per the Centers for Disease Control and Prevention (CDC), more than one-third of U.S. adults (35.7%) are obese. This points the finger towards the fast-food industry as they are using trans fats (responsible for clogging arteries) in their products to make them more mouth-watering.
YUM! Brands Inc. (YUM, Financial) is still in a better position as its wings are all over the world, compared to its peers. This Louisville, Ky.-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.
Keeping Dividends Steady
The company declared a payout of $0.335 per share of its common stock. This amount matches that of the company's two previous disbursements, the most recent of which was paid in January. Prior to that, the company had distributed $0.285 per share.
In recent times, Yum! Brands has tended to lift its dividend once per year. The current dividend annualizes to $1.34 per share. That yields 1.9% at Yum! Brands' current stock price of $69.69.
Solid First-Quarter Results
In the first quarter, Yum! Brands posted earnings per share of $0.87, $0.02 better than expected and $0.17 higher than last year's first quarter. Total revenue rose 7.1% year over year to $2.7 billion. In terms of same-store sales growth, the China division led the way with a 9% increase. KFC saw a 1% rise in same-store sales; Pizza Hut recorded a 2% decrease, and Taco Bell saw a 1% decline in same-store sales.
Zeroing In on China for Growth
Yum Brands, whose fast-food trio includes the Taco Bell, KFC and Pizza Hut chains, saw its stock rocket more than 3% in after-hours trading, as the company reported better-than-expected profit for its first quarter on rebounding sales at KFC in China. Yum stock jumped $2.64 to $80.12 in after-hours trading after the report was released. Most of the good news came from China, where the company said same-store sales rose a hefty 9% for the period.
"Yum Brands is clearly on its way to a strong bounce-back year," said CEO David C. Novak, in a statement. "We have significant building blocks in place in China and each of our divisions to drive sales and profit growth this year and beyond."
New Menu May Trigger Sales
Yum! Brands is counting on new menu items from KFC, Taco Bell and Pizza Hut to boost sales. If the new menu items can drive traffic into its stores, Yum! Brands hopes to capture sales that ordinarily would have gone to a competitor like McDonald's (MCD, Financial).
For KFC, the company is looking for the KFC Double Down to boost sales like the item did when it was first introduced back in 2010. In its first month, KFC sold more than 10 million Double Downs. The Double Down is certainly a unique menu item. It consists of bacon, Monterey Jack cheese and the Colonel's sauce between two 100% white meat KFC chicken fillets.
Taco Bell's focus has been on its new breakfast menu and going head-to-head with McDonald's during breakfast hours. The new breakfast items include Cinnabon Delights, Waffle Tacos, Breakfast Burritos, A.M. Crunchwraps and A.M. Grilled Tacos. Taco Bell has also launched an aggressive marketing campaign to raise awareness. According to Yum! Brands CEO David Novak, Taco Bell's breakfast is "off to a great start."
China is especially important to Yum because the company gets more than half of its revenue from there. It has a much higher exposure to China than other companies in the fast-food sector, including McDonald's, Burger King (BKW, Financial)Â and Wendy's International (WEN).
On Dec. 18, 2012, an investigation into KFC's supply chain was prompted by a report broadcast on China's national television, or CCTV which showed that some of the poultry farmers, which supplied KFC were using excessive levels of antibiotics in their chicken, a violation of Chinese law. Since then, YUM has struggled to counter reports in China that its chicken suppliers were using unapproved levels of antibiotics. On Jan. 25, 2013, the Shanghai FDA concluded its investigation and brought no charges against Yum.
Therefore, accelerated sales can be expected from KFC during the second half of 2014. KFC is also offering new products which include golden extra-crispy chicken, larger buckets of chicken wings, and new openings of dessert corners to cross-sell to existing traffic within stores. Pizza Hut brands (Pizza Hut Casual Dining, Pizza Hut Home Service, and Pizza Hut Express) combined represents just under 10% of YUM China’s total revenue. In 2013, among approximately 400 new store openings, half are Pizza Hut stores.
Recently, the company has announced that it has appointed David Gibbs as president of its Pizza Hut business in the U.S., and Jason Marker, as general manager of its KFC business in the US. This year YUM reorganized its business by combining its YUM Restaurants International (YRI) and the U.S. individual divisions for KFC, Pizza Hut and Taco Bell. YUM Restaurants China and YUM Restaurants India remain separate divisions given their strategic importance and enormous growth potential.
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 very popular among Indian people. 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.
On a Concluding Note
The year 2014 will be great for YUM and its valued investors as the company has chalked out several growth plans strategically. Further, problems in China have come to an end. Therefore, YUM is all set to sail its ship. Except for the year 2013, the company is expected to maintain double-digit revenue and earnings growth for at least a couple of years into the future. The company is also forecasting earnings-per-share growth of 20%.
Valued investors can expect more returns because of YUM’s strong foothold in Africa compared to McDonald’s. 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.
