Why Yum! Brands, Inc. Investors Are Breathing a Sigh of Relief Today
Shares of Yum! Brands may have jumped nearly 10% Tuesday morning, but don't chalk it all up to the fast-food restaurateur's after-the-bell quarterly earnings beat yesterday.
Sure, Yum! Brands' fourth-quarter earnings did rise 4% year over year to $0.86 per share, exceeding expectations for earnings of $0.80 per share. But Yum!'s Q4 revenue also rose just 1% to $4.179 billion, missing estimates for sales of $4.26 billion.
And Yum! already told investors three weeks ago that fourth-quarter China Division same-store sales fell around 4% over last year -- a result capped by 2% growth in December, including a 5% increase at KFC and a 3% decline at Pizza Hut.
But that wasn't any particular surprise given the low bar set in China around this time last year, when sales began to plummet following a quality-assurance scare from a now cut-off supplier. Then last spring, Yum! warned that an outbreak of avian flu in the region had further devastated its rapport with consumers -- even though avian flu itself doesn't affect the quality of Yum!'s food.
KFC restaurant in China. Source: Yum! Brands.
Here's why investors are happy
So, what has everybody so excited today?
In short, avian flu has experienced a recent resurgence in the region -- at least 21 people have died from the virus in China so far in 2014 -- so many analysts had feared Yum!'s forward guidance would reflect a replay of last year's crushing outbreak.
But it didn't. In fact, Yum! wasted no time reiterating its full-year 2014 guidance for earnings-per-share growth of at least 20%, effectively allowing shareholders to breathe a big sigh of relief.
So, why isn't bird flu hurting Yum! Brands this time? For one thing, the company has remained on the offensive for the better part of the last year to educate diners that properly cooked chicken is perfectly safe to eat. CEO David Novak reiterated this stance in yesterday's press release, saying, "In China, we strengthened our poultry supply chain, made significant progress rebuilding consumer trust in the KFC brand, and made substantial gains in restaurant productivity."
And that brings up another point: Namely, that Yum! has made big strides to increase profitability in China despite those negative comps. Yum!'s Q4 China restaurant margin actually increased 0.4% over last year to 14.3% -- an amazing feat considering the circumstances.
Don't get me wrong: This doesn't mean Yum!'s China operations are completely out of the woods.
To the contrary, I think investors should tread lightly considering Yum! management repeatedly insisted last year that China same-store sales would turn positive sometime in the fourth quarter. Then in October, shares plunged when they finally admitted it simply wouldn't happen. So, why should we believe the company's guidance this time around?
Personally, I'm taking it with a grain of salt.
The funny thing is, I still love Yum! Brands given its significant growth opportunitiesoutside of China. After all, Yum! has already outlined plans to double U.S. Taco Bell sales by 2021, and it continues to expand in India at a rapid clip.
In the end, that's why I'm sticking by this fast-food giant over the long term. When Yum!'s China segment does eventually rebound, it'll be gravy for patient investors down the road.
Yum! Brands isn't alone
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The article Why Yum! Brands, Inc. Investors Are Breathing a Sigh of Relief Today originally appeared on Fool.com.
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