Yum Spices Up Stellar Quarter With Yummier Moves!
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Yum! Brands (NYSE: YUM), the owner of a number of amazing food chains, posted its second quarter results recently. Though its performance might not look edible at the first instance, it was quite digestible on a number of grounds.
Analyzing The Quarter…
Revenue surged 12% to $3.17 billion, beating Street’s estimates. The top-line growth was led by the launch of its new Doritos Locos Tacos dish in the Taco Bell food chain which played a major role driving 60% of the profits from U.S. The U.S. market had been dull for Yum in the last few quarters, and this was quite a worry for the food retailer. But this time, things started looking up as it witnessed good volumes from the U.S. consumers and a healthy same-store growth of 7%.
Yum! Restaurants International was the star performer in both U.S. and India. But the company is not yet satisfied with the recovery since it is planning to attract more traffic with the introduction of a healthier and fresher menu called Cantina Bell in the coming time.
Everything is hunky dory until we move to the bottom line, which was not as delightful as the top line. Though earnings were in the green at 67 cents per share, it failed to meet expectations. Apart from a higher tax rate, a major pullback came from Yum’s favorite China market where the increasing ingredients and labor costs affected the income unfavorably. Same store sales growth of 10% also reflected the signs of slowdown in China since it used to be around 20% in the earlier quarters.
But there is nothing much to get scared about since there are companies who are facing a similar problem of high dependence on the Chinese market such as Starbucks (NASDAQ: SBUX), a coffee retailer, which has been struggling with the rising costs and has managed to tackle it by increasing product prices. Yum has also done the same and is planning to further increase prices since the burden of high costs has not yet been pushed to the consumers completely. Hence, it expects to strengthen its margins in the months to come.
Expanding the wings
Another positive element this time was the metric of average unit volumes which has been increasing over the last 5 years and now stands at $1.7 million for the most popular Pizza Hut and KFC food centers. Moreover, this is expected to grow further with plans of expansion in to new geographic regions. The two chains offer a variety of food and attract youngsters to a large extent, the benefits of which are remarkable. Also, Pizza Hut’s strategy of offering value meals and changing its menu semi annually drives customers into the restaurants.
The company believes that demand for its products is extremely high in Europe, especially France and it will be planning to expand its footprint soon. This will be a great challenge since its rival, McDonald’s (NYSE: MCD), already enjoys market leadership for a long time and has almost 2600 restaurants in operation in the country. Though Yum is almost 10% of McDonald’s size in the European market, the company believes that a recovery in the economy will help the giant grab a much larger presence. In fact, this is the reason why Yum Brands is not much affected by the sovereign crisis since it largely depends on the emerging markets such as India and China which show high demand.
Yum is very confident of its growth and continues to foresee enormous potential in emerging markets, China being the most important one. With this belief, it plans to open 1700 units this year out of which 700 will be in China. 160 new units have already been opened in China, the effect of which could be seen with the sales increase of 27% in the region.
The company is making a number of efforts to provide value to investors. It is continuously striving to come up with new strategies to make its market presence stronger each time. With the increased expansion efforts and the launch of new items on the menu, Yum has been making itself yummier to the investors.
A slight miss on the bottom line cannot stop a giant like Yum, especially with the price hike coming its way to fight the demon of cost inflation. No investor can take his eye off the company given its huge potential to come out in green in spite of reigning difficulties. It is a definite taste for your portfolio.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's and Starbucks. Motley Fool newsletter services recommend McDonald's, Starbucks, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.