Chipotle Mexican Grill, Inc. (CMG), Panera Bread Co (PNRA), Yum! Brands, Inc. (YUM): Searching for Sustainable Revenue Growth

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Yum! Brands

As of June 30 Yum! Brands, Inc. (NYSE:YUM) has over 39,000 restaurants in more than 130 countries and territories. During the quarter, total international development was 315 new restaurants; 76% of this development occurred in emerging markets. The China Division opened 100 new units in the second quarter, and 326 new units year-to-date. Yum! Brands, Inc. (NYSE:YUM) Restaurants International, or YRI, opened 205 new units in 50 countries, including 129 in emerging markets. Outside the United States, the Yum! Brands, Inc. (NYSE:YUM) system opened over five new restaurants per day, making it a leader in international retail development.

However, the company has now reported three consecutive disappointing quarters, and a highlight of the most recent second quarter report on July 10 was a 20% drop in same store sales in China, a 63% decline in Chinese operating profit, and a 5.0 percentage point decline in margins. The overall worldwide system sales grew only 1%, including 6% at YRI (stores outside U.S., China, and India), 2% in the U.S. System, but sales declined 12% in China. June same-store sales declined an estimated 10% for the China Division, improving from a 19% decline in May. This included an estimated decline of 13% at KFC and 6% growth at Pizza Hut Casual Dining.

From the Yum! Brands, Inc. (NYSE:YUM) column you can see its issues in China are having a material effect on company revenue and growth. Yum! Brands’ revenue is down 12% in China, causing global revenue to be down 8.3% this quarter. Same store sales in China were down 20%, which reduced global same store sale to an anemic 1%.

The China Division sales and profits were significantly impacted by adverse publicity surrounding the Avian flu, the poultry supply incident in December, and now the report of tainted ice from its ice machines. The Chinese media seems to be focused on Yum! Brands stores and is finding one negative news story after another. I am not sure if Yum! Brands, Inc. (NYSE:YUM) can overcome all this negative publicity in China, but if it does, the growth story looks appealing with a total international development of 315 new restaurants, of which 76% are in emerging markets.

Conclusion

All three companies have compelling growth stories and should be good long-term investments. Chipotle Mexican Grill, Inc. (NYSE:CMG) is starting a new chain of ShopHouse Southeast Asian Kitchen restaurants, its new concept serving Asian inspired cuisine, and this may accelerate its growth in the future. After Panera Bread Co (NASDAQ:PNRA) reported disappointing results for the second quarter, the stock price fell about 10%. The company’s CFO has enough confidence in the company that he has recently purchased 1,500 shares of the stock. Yum! Brands is struggling in China; however, if it can overcome the negative media campaign in China then Yum! Brands’ recovery may be an unusual opportunity for some long-term profits. On the top-line all three companies are worth owning, but I feel that Chipotle Mexican Grill is the better choice for the long-term, buy-to-hold investor.

The article Searching for Sustainable Revenue Growth originally appeared on Fool.com and is written by Art Crabtree.

Art Crabtree has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. Art is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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