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Why Are Yum! Brands, Inc. (YUM) Earnings Falling?

Yum! Brands, Inc. (NYSE:YUM) will release its latest quarterly report on Wednesday. Yet even though the stock has held up very well, Yum! earnings aren’t growing at the pace that investors would like to see, raising questions about what the company can do to bolster growth.

Yum! Brands, Inc. (NYSE:YUM)Yum! Brands, Inc. (NYSE:YUM) is the fast-food giant behind popular brands KFC, Taco Bell, and Pizza Hut. Despite the company’s widespread reach throughout the U.S., Yum! has increasingly relied on emerging-market countries rather than more-mature developed markets for its growth. But with emerging markets facing new challenges of their own, the company has some new obstacles to overcome. Let’s take an early look at what’s been happening with Yum! Brands, Inc. (NYSE:YUM) over the past quarter and what we’re likely to see in its quarterly report.

Stats on Yum! Brands

Analyst EPS Estimate $0.54
Change From Year-Ago EPS (19%)
Revenue Estimate $2.93 billion
Change From Year-Ago Revenue (7.6%)
Earnings Beats in Past 4 Quarters 3

Source: Yahoo! Finance.

Can Yum! spice up its earnings this quarter?
Analysts have reined in their earnings estimates on Yum! Brands, Inc. (NYSE:YUM) in the past few months, with an $0.08 per share reduction in their calls for the June quarter and cuts of $0.09 and $0.07 per share for their full-year 2013 and 2014 consensus earnings estimates, respectively. But the stock has largely ignored those calls, having risen almost 7% since early April.

The big problem for Yum! Brands, Inc. (NYSE:YUM) lately has been China, where the company suffered a whopping 20% same-store sales drop during the first quarter. An outbreak of avian flu has led to widespread consumer fear about Yum!’s KFC restaurants, and although those fears are irrational as long as chicken is properly cooked, both Yum! and McDonald’s Corporation (NYSE:MCD) had used a supplier that produced tainted chicken. Despite having taken measures to stem the losses, Yum! has seen the negative trend in China continue this quarter, with May same-store sales in the emerging market falling 19%.

Interestingly, though, Yum! is now looking back to its domestic market for growth. In May, the company gave an outline on how it could double sales from its U.S. Taco Bell restaurants in the next eight years. The initiatives Yum! is looking at aren’t all that groundbreaking, with the introduction of a new breakfast menu, opening new stores, and introducing higher-quality menu items with a focus on healthier food. Bolstering Taco Bell’s perception as being attentive to health concerns could help it tap into the customer base that has helped provide Chipotle Mexican Grill, Inc. (NYSE:CMG)‘s immense growth in recent years. Some of that challenge has showed up in Chipotle’s recent results, with much of its earnings growth having come from one-time items and with same-store sales growth having slowed to just a 1% rate in its most recent quarter.

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