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Problems in China Refuse to Die Down for This Fast Food Giant

February 17, 2014 | About:

Yum! Brands Inc. (NYSE:YUM) operates around 6,000 restaurants in China. The ongoing problems in China are not going to die down soon. Recovery in this region may take longer than what is anticipated. Yum is the biggest Western restaurant operator in China and had almost 4,500 KFC outlets there at the end of its third quarter.

Unfortunately, YUM's comparable same-store sales haven't improved over the past year. China accounts for more than half of Yum's operating profit.

Unimpressive Figures

YUM achieved revenue of $4.179 billion for fourth quarter of fiscal year 2013 ending Dec. 29, 2013. The corresponding value for 2012 was 1% lower at $4.153 billion. For fiscal year 2013, revenue was $13.084 billion compared to $13.633 billion in 2012.

Net income declined by 5% from $337 million in fourth quarter 2012 to $321 million for the most recent quarter. For 2013 net income declined by 32% from $1.597 billion to $1.091 billion earned in fiscal 2013.

Notwithstanding a 1% increase in sales in the U.S. and 5% for the international market in 2013, KFC generated a return on assets of 14% and a return on equity of 47% over the 12 months including the third quarter of 2013. Total assets declined by 4% to $8.7 billion in 2013. Long-term debt remained almost constant at $2.918 billion, as of December 2013. The company has a market capitalization of $29.5 billion.

Entry Into India: Can It Change the Scene?

Taco Bell is one of the flagship properties of Yum Brands, the company that has foisted KFC and Pizza Hut upon India with so much success. In a few short months, they will 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 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 .

KFC Plagued by Ongoing Problems

It looks like KFC's problems in China will continue into 2014, although the situation is certainly better than it was six months ago. Chinese consumers remain worried about food safety, and competing chains are gaining ground. KFC’s China sales plummeted after a media channel reported that one of its suppliers was selling chicken that had been given unapproved antibiotics and hormones. By mid-year, KFC’s declines were slowing and Chief Executive Officer David Novak expressed confidence that sales would turn positive in the fourth quarter. But losses have remained steady.

To End

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 have 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.

Rating: 4.1/5 (8 votes)


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