The Kentucky-based company Yum! Brands (NYSE:YUM) reported its second quarter results last week on Wednesday. The quick service restaurant giant came out with flying colors after its biggest market China showed signs of steady recovery. The second quarter profit of the company went up 19% on the back of reviving Chinese market where concerns about chicken were seen to subside.
Despite such good news company shares fell by more than 2%. To know why this happened, a deeper look into the quarterly numbers is required.
A Quick Look at the Quarter Numbers
Revenue during the quarter climbed to $3.2 billion, up 10.3% over last year’s second quarter. Net income rose to $334 million compared with $281 million in the year ago quarter. Last year Yum’s Chinese division, with nearly 6,500 KFC outlets, accounted for more than 35% of the operating profit for the company. This indicates the importance of the company’s China division. However, home market was a bit of a disappointment.
Rebound in China
The operator of KFC, Pizza Hut, and Taco Bell finally took a sigh of relief after it saw China sales gradually moving back to normal level. Revenue from established places in the mainland surged 15% during the quarter. Sales in KFC increased 21%, while Pizza Hut saw its sales remain stable at the year ago level.
KFC’s improvement is a big number for the fast food major; particularly after the severe sales decline it’s suffered after the chicken issue in December 2012. Inappropriate level of antibiotics in chicken given by suppliers was harmful, and this raised an alarm among the Chinese population that shun products of the largest fast food Westerner. This has had a far-reaching impact on Yum.
However, the company has been able to restore confidence in the brand among the consumers through market campaigns and stricter quality control. This helped Yum see better numbers in the second quarter. The company re-affirmed its target of opening 700 outlets in 2014. Yum has revamped the menu of its KFC restaurant to attract greater numbers.
What Happened In the Home Market and Elsewhere?
In the U.S. market both KFC and Pizza Hut saw sluggish sales. Sales in KFC comparables stores plunged 2%, while Pizza Hut sales encountered a greater fall of 4% during the quarter. Taco Bell was the only operating unit in Yum’s domestic market that reported 2% sales gain. As a measure to improve sales, Yum plans to implement changes and restructure Pizza Hut to fuel growth in the home market.
While Yum got a mixed bag of results in the home market, the Indian market too was disappointing. Analysts expected the Indian economy to bring 1.6% sales gain to Yum. In contrast, the restaurant giant suffered a sales fall of 2%. Yum has been expanding its Indian operations at a fast pace as the middle class and the affluent section of the society are growing. However, Yum is not the only fast food player, Jubilant Foodworks and Domino's Pizza shared the same fate. These were the main reasons that pulled down investors’ positive sentiment despite improvements in China.
Improvement in the KFC sales is an encouraging sign for the investors, but it’s important for the company to lift its dimming Pizza Hut sales in home and other markets. The company is not in any hurry and plans to bring disciplined growth across the globe. While the company has significant growth programs, it would be interesting to watch how it fares in the long run.