Analyzing Why Yum! Brands Turnaround is Gaining Speed
Yum! Brands (YUM, Financial), the American fast food company and licensed operator of Taco Bell, KFC, Pizza Hut, and Wing Street worldwide, has recovered well from the avian flu scare in late 2013. The company has finally taken care of its woes in the Chinese market and consequently, investors have been rewarded for their patience.
Yum! is the world's largest fast food restaurant company in terms of system units—more than 41,000 restaurants around the world in over 125 countries. In 2014, Yum!'s global sales totaled more than US$13 billion. However, I expect Yum! to repeat the heroic of 2014 this year as the company’s expansion plans kick in. Yum! plans to enlarge their achievements with a channel of innovation. The entire marketing plan is strategic, different and away from the normal meat, cheese, or muffin podium characteristic of its morning competitors. In which, advertising and marketing plays an important role.
Disappointing quarter
For the Q1FY15, EPS decreased from $0.87 to $0.80, declined by 7% compared to the first quarter of last year. Due to robust dollar foreign exchange breezes, operating profit was down around $20 million. After the loss of $0.20 EPS in Q4FY14, periodically EPS is still trending downwards. Despite the drop, the company managed to beat the estimates comfortably.
Same store sales and China operating profit declined by 12% and 31% respectively, prior to foreign currency conversion. Full-year FY15 results could be improved, if Eps grows up in the first quarter.
When sales were down nearly 11%, China region sales declined 6% compared to Q1 of last year. Yum! Brands is focused on expanding its unit in China, as it opened 171 units and planned to open at least 700 additional new restaurants in China this year.
U.S. conveyed its third successive quarter of solid same-store sales development with comps of 7%, the best performance by this business in nearly 10 years.
Yum! Brands planned to open 2,100 new restaurants, to create new record in international growth. In Q1, 294 new restaurants were opened by Yum Brands. Most prominently, 88% of growth is happening in emerging markets, which will help to reduce the company’s dependence on the China region.
Underperforming Hut
The exceptioin is that Pizza Hut is not performing so well, as it is the ninth straight quarter in which Pizza Hut failed to record positive comps growth. Comparable sales decreased by 1%.
The customization in Pizza Hut’s menu last year, adding “Flavors of Now”, gave clients about 2 billion personalization options for their pies. This made the menu extremely complicated and the downfall isn’t surprising.
Similarly, Yum! Brands' effort to establish a position in India is also going crooked as comparable sales have degenerated quarter after quarter.
Conclusion
Yum! Brands’ Pizza Hut woes and lack of growth in India have been offset by staggering growth in other emerging markets. The company has also managed to reduce its dependence on China and split its revenue streams along difference streams. That being said, China is still a major growth driver for Yum! and the company has been making headway in the Chinese market as well. Yum! Brands’ recovery was terrific and despite the stock being near all-time highs, I think inventors can consider buying it.
