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With China Stable, Yum! Brands, Inc. (YUM) Targets Growth

Starting in 2012, and through the beginning of this year, the prize asset of fast-food giant Yum! Brands, Inc. (NYSE:YUM) was the revitalized Taco Bell chain. The Mexican fast-food shop has been introducing new items that have tracked very, very well with young people, and have brought new attention to the once-sleepy chain. For the second quarter, though, it seems that attention has shifted back toward China, where growth has stabilized after falling for some time. The company impressed the Street with an earnings beat, but let’s take a closer look at the status of Yum! Brands, Inc. (NYSE:YUM)’s operations.

Earnings recap

Yum! Brands, Inc. (NYSE:YUM)Compared to the year-ago quarter, Yum! Brands, Inc. (NYSE:YUM)’s revenues and net income dropped substantially, yet it did not come as a surprise to Wall Street analysts, whose bottom-line expectations were still surpassed.

For the second quarter, revenues fell 8.3%, to $2.9 billion. This comes in a bit lower than the average estimate of $2.92 billion, and follows a 7.6% drop in sales from the first quarter. Same-store sales rose 1%, 0.4 percentage points below analyst expectations.

But, the bottom line was able to eke out a beat, with the company hauling in $0.56 per share (excluding one-time items) on $281 million in net income. The numbers come in about 15% lower than the prior year’s earnings, but a reasonable premium to analyst estimates of $0.54 per share.

In previous quarters, the company had been suffering from a sharp drop-off in China — a nation that accounts for 50% of the company’s revenue. Yum! Brands, Inc. (NYSE:YUM)’s KFC was hit hard by an outbreak of avian flu, as well as an investigation into one of the company’s Chinese suppliers. Analysts believe this situation is now largely under control, and the falling sales have shown signs of stabilization. Same-stores sales in China fell 10% in June — two percentage points less than expected. For the full quarter, same-store sales in China were down 20%.

All in all, the earnings release was enough to send the stock up marginally; but what lies ahead for the company?

The future

In line with previous announcements, Yum! Brands, Inc. (NYSE:YUM) is expecting a mid-single-digit drop in sales for the full-year 2013. Management believes Chinese same-store sales will begin to tick back up by the fourth quarter, and that the issues surrounding the company have largely blown over.

Investors can expect a steady turnaround, and perhaps continued growth from Taco Bell, which is rolling out a new $1 menu to combat the likes of McDonald’s Corporation (NYSE:MCD).

Yum! remains a strong long-term pick in the fast-food industry.

The article With China Stable, Yum! Targets Growth originally appeared on Fool.com and is written by Michael Lewis.

Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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