Yum Brands In Doubt?

Yum! Brands (NYSE: YUM  ) is having a tough two weeks as the management reported that their sales is on a 6% decline as opposed to last year’s 21% growth, due to the slowdown in China.


The Yum! Brands stocks lost $7 or around 10% of their value. There has also been a reported scandal which involved two suppliers to the company’s KFC restaurants. These suppliers were believed to have used antibiotics in excessive amounts for their chickens. Chinese customers boycotted the restaurants due to the scandal, gravely affecting the company’s reputation. Due to this, the stocks of the said company experienced another 5% value decline. Yum Brands! turn to be not so appealing anymore.

Big trouble in little China, but was it that bad?

The company tried its best to control the damage. To date, only two out of the 30 suppliers did not follow the health regulations. But despite this, it will be hard to divert the attention to a considerably good quarter which posted a 1% revenue growth and a 5% increase in the worldwide system sales (aggregate total of all company-owned or franchised restaurants).

 

Adjusted system revenue in China still managed to increase by 20% for the year and 11% in the quarter despite the bad PR and reduced company guidance.  In addition, in spite of the 6% decline for the quarter, the comps still grew by 4% this year. System sales of Yum! Restaurants International segment also produce a 7% increased. Both YRi and US posted a 3% growth in comps.

Amidst the bad impression, Yum! still performed better than McDonald’s (NYSE: MCD  )  in some key areas. McDonald’s only recorded a 3.1% growth versus the 5% growth of Yum! across the global system. McDonald’s US consolidated revenue only increased by 2% and posted a minimal 0.3% comp growth in the quarter. Despite being larger, McDonald’s is deemed to be just at par with Yum!, considering negative acceptance in China. McDonald’s China comps are still recorded at -0.9%

Can the competition seize an opening?

Let’s also look into Yum’s restaurant comp breakdown. There was a reported 1% decline in Pizza Hut. But KFC, despite the scandal, still advanced by 4%. Hopefully, the scandal will die down come next quarter so as not to affect KFC’s sales anymore. Meanwhile, Taco Bell contributed 5% growth. This negates the issue of giving up of Yum’s! market shares to Chipotle Mexican Grill (NYSE: CMG  ).

Chipotle insists that they are not losing to any of its rivals and declares its 4% growth in comps. But this is still 1% lower than that of Taco Bell, which just launched its Cantina Bell food line to direct compete with Chipotle. It seems that the competitive strategies of Taco Bell are effective, as proven by the comp growth.

Will China ever forgive?

Yum! Brands considers the world’s second largest economy, China as an important market. With this, the company made big investments in the said country, even with the knowledge that the growth in the area might be long-term. There has been a 25% decline in comps for the first quarter. Also, earnings per share for the year are seen to decrease by mid-single digits.

But Yum! Brand is known in consistently delivering double-digit earnings-per-share growth, with an average of 13.75% for the past four quarters. This might have just been a really tough situation for the management to handle. Eventually, the 25% comp decline has already been exceeded by the 14% comp growth posted in the first quarter of 2012.

Still simmering or just right?

The issue might have scared some but not all investors. The stocks may have declined but not for long. It will still be unfortunate for the investors who keep on waiting for a good bargain because it won’t still take place. Stocks of Yum! Brands are examples of considerably expensive stocks, which might have stumbled for a time but managed to get back up.

 

Even if there are headwinds that might have affected the price of the stocks, the value of the company remains the same. I still think McDonald’s still has a better value though. But if in case Yum! drops by another 7-10%, I might re-evaluate.

More from The Motley Fool

McDonald’s showed one of the worst performing blue chip stocks in 2012, after making its investors earn a lot in 2011. Our top analyst will explain further whether you have something to worry about by this trend. He’ll also enlighten you if McDonald’s stocks are best buys at the recent prices. Click here now to read our premium research report on the company.

 

 

Posted by Diane Araga, on March 16, 2013 at 1:00 PM