Are You Ready to Feast on Profits?

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Expansion in emerging markets, especially China, has been a very lucrative idea for many retailers, since these markets offer excellent growth opportunities Moreover, these markets are untapped, unlike the developed economies such the United States. Hence, companies growing their footprint in emerging markets have benefitted tremendously. One apt example is Yum! Brands (NYSE: YUM), which has been a wonderful performer, especially in its Chinese operations.

Yum! Brands recently posted its third quarter results which set the Street on fire, making investors increasingly excited about the company. Its stellar results beat analysts’ expectations, sending shares north. Yum had a great quarter! Let’s discuss.

The Drivers…

Yum’s initiative of expanding in China and opening as many as 192 new restaurants in the region paid off well. This enabled revenue to grow to $3.57 billion, an increase of 9% over last year. Its great performance in China was also accompanied by other segments, namely the United States and the International segment. Pizza Hut and KFC were the favorites of youngsters and experienced increased demand.

Moreover, a key driver during the quarter was its great restaurant menu that wowed customers. Taco Bell’s new upscale menu, which was created by a celebrity chef, attracted attention. Additionally, its Cantina Bell menu, which offers fresher and healthier food, was another driver and of course its previous quarter’s star dish – Doritos Locos Tacos drove revenue higher. However, the rollout of its Cantina Bell menu is still to show its full benefits since it was added in the middle of the quarter.

Yum! Brands performed well on all fronts with gross margin improvement as well. Its adjusted earnings surged 19% over last year to 99 cents per share. In fact, previous quarter’s earnings were at 67 cents per share, dragged down mainly because of higher input costs, especially in China.

In fact, Yum was not the only one to face such a problem. Even Starbucks (NASDAQ: SBUX) had been facing similar concerns of higher ingredients and labor costs which were weighing heavy on its bottom line and margins. Hence, the coffee retailer increased its product prices in order to endure the crisis. Starbucks also added new products such as its single serve coffee brewer called Verismo and added a new fruit juice line for its survival. The new coffee brewer is expected to be really beneficial, contributing $0.06 to $0.09 to Starbucks' earnings per share by 2016. Though Starbucks managed costs by increasing product prices and adding new products, Yum had a different approach, except for the price hike.

The food retailer managed its costs well this time through operating efficiencies and raising product prices. A very smart move by the company, in order to reduce costs, was to reduce the number of company owned stores to 10% of the total store base. It has been encouraging more franchising in its business model, making its cost structure lighter.

And The Brightness Continues…

Good performance and great strategic efforts do not stop here. With a total of 394 new restaurants in the quarter, the company plans to open as much as 1750 new restaurants during the year, 750 will be in China. This will be a strong growth catalyst, especially because of the retailer’s focus on emerging markets, where it is experiencing rapid growth.

Its new Cantina Bell menu also looks good, especially because it offers fresh and healthy foods. With consumers becoming increasingly health conscious, healthy foods are in great demand. As a result, companies following this strategy are reaping huge benefits. For example, General Mills (NYSE: GIS) has been increasing its focus on healthy foods which are made of fresh and natural ingredients. Its Greek yogurt and baked snacks have been luring customers galore, sending its revenue 5% higher in its recent quarter. The key reason for a 35% jump in General Mills' earnings was its yogurt business which made customers go head over heels, enabling the company to benefit. The star yogurt business was recently strengthened through the acquisition of Yoplait’s yogurt business. However, General Mills' focus on healthy food is not limited to its yogurt business. It is also intending to expand its cereal business to China since the market for healthy cereal breakfast has been growing. 

The Takeaway

Yum! Brands is taking the right measures to solve its ongoing problems. Its strategy of expanding in emerging markets and continual innovation in its food menu has proved beneficial. It is expected that it will benefit more from these efforts. Also, its cost cutting strategy will be helping the food giant boost its bottom line further. In fact, Yum should be a great investing idea since it has been repurchasing its shares and paying out dividends. With a large number of new stores in the cards and a bright outlook, this company seems like a great growth stock for investors. You should not ignore this one at all.

justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Starbucks. 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.

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