Yum! Brands, Inc. (NYSE:YUM)’s recently released second-quarter results were not impressive with sales and profit falling.
But the company gave some positive indications about its business in China which is recovering according to expectations with same store sales expected to become positive by the end of the year.
Results and strategies
The results as mentioned earlier were not very impressive, as earnings, excluding special items, declined 16% versus last year. Although Yum! Brands, Inc. (NYSE:YUM) International and the U.S. business posted an operating profit growth of 12% and 4%, respectively, the drop of 63% in operating profit (prior to foreign currency translation) in China led to a drop of 20% in overall operating profit.
KFC China’s operations were mainly impacted by a poultry supply incident in late December and the extensive media surrounding avian flu in the beginning of April. The second quarter was impacted because of the residual effect of the same. Now the extensive media surrounding avian flu in China has subsided, and same-store sales at KFC are on the road to recovery.
To overcome this crisis, the company had launched a quality assurance advertising campaign in mid-April, reminding consumers of the company’s commitment to quality in China and that properly cooked chicken is perfectly safe to eat. It also created a value initiative centered on wings, along with advertising protein alternatives that are available at KFC such as shrimp and mushroom rolls. The company is hopeful that these initiatives will contribute to a recovery in sales. In fact, KFC same-store sales decline in June was 13% versus the 26% decline reported for the second quarter which indicates progress.
Going further, despite the recent negative developments in China, the company remains bullish on the opportunities in the region. The company operates 900 stores currently in China and its new unit development target of at least 700 new stores remains unchanged. This will take its total to 1,600 new units in a two-year period.
Apart from China, Yum! Brands, Inc. (NYSE:YUM) is on target as far as delivering operating profit targets for the year are concerned. Yum! Restaurants International is banking on the high-growth emerging markets such as South Africa, Russia, and Thailand, which have shown solid performance. Yum! Restaurants India’s performance was also satisfactory.
Taco Bell in the United States continues to be positive in overall same-store sales. The company plans to open 125 net new units of Pizza Hut and 80 net new units of Taco Bell in United States. In India, the company plans to open another 150 units for the year and plans to double its restaurant count to 1,000 by 2015 in India.
What’s the competition doing
McDonald’s Corporation (NYSE:MCD) has presence in 119 countries with 34,480 restaurants serving various food items, soft drinks, coffee and other beverages, as well as breakfast menus.
Although McDonald’s Corporation (NYSE:MCD) is upbeat over the market in China, it has taken a balanced approach. It would create a balance between franchised versus owned stores. The company has its eyes on dynamic markets such as South Korea and Malaysia, which, like China, should also see phenomenal growth.
Also, McDonald’s Corporation (NYSE:MCD) trades at a cheaper P/E multiple of 18 as compared to Yum! Brands, Inc. (NYSE:YUM)’s 23 times earnings. McDonald’s Corporation (NYSE:MCD) also has a greater dividend yield of 3.1% when compared to Yum! Brands, Inc. (NYSE:YUM)’s 1.9%. So investors looking for a more diversified business should consider McDonald’s Corporation (NYSE:MCD) rather than Yum! Brands, Inc. (NYSE:YUM) as it is a safer option and also trades cheaply, apart from offering a better yield.