Are Taco Bell, KFC and Pizza Hut Enough for Yum Brands?
Three monster restaurant chains may not be enough for Yum Brands (YUM). The parent company of Taco Bell, KFC and Pizza Hut posted quarterly results on Wednesday. It wasn't very impressive.
Worldwide system sales climbed a mere 3 percent from a year earlier despite expansion at all three concepts. Things got worse on the bottom line, where deteriorating margins resulted in its adjusted profit falling 29 percent to 61 cents a share, and that was before writing down some of its problematic assets in China that resulted in a reported deficit.
This is the third quarter in a row that Yum Brands has fallen short of Wall Street expectations. The shortcoming can be traced back to China, where its KFC and Pizza Hut locations continue to suffer after a summertime scare at a KFC supplier that was caught selling meat past its expiration date. Yum cut ties with the supplier, but consumers have been slow to come around.
China's holding Yum back. Same-store sales plunged 16 percent for Yum! Brands in the world's most populous nation, and restaurant margins were cut in half. The company concedes that the recovery in sales has taken longer than it expected. It's pointing to a recovery by the second half of the year, but that's not much of a prediction. The supplier scare happened in July of last year, and after seeing comps plunge 14 percent during the third quarter and now 16 percent during the fourth quarter, it will be easy to measure up against those troublesome performances.
Things are faring better for Yum closer to home. KFC and Taco Bell posted same-store sales growth of 4 percent and 6 percent, respectively, in the U.S. Comps were flat at Pizza Hut, but the pizza delivery industry has always been competitive.
This would make it seem as if all that Yum has to do is wait for Chinese diners to eventually come around. However, given the generally ho-hum performance, it's fair to wonder if Yum needs to expand its portfolio.
There Has to be More Than KenTacoHut
Yum isn't perfect. Taco Bell is the best performer, but that 6 percent uptick in sales at the typical store becomes a lot less impressive when one considers it wasn't serving breakfast a year earlier. Once March comes around and we're seeing things on an apples to apples -- or Waffle Tacos to Waffle Tacos -- basis, the year-over-year performance may not be so great. The operating profit at Pizza Hut declined 11 percent, and KFC comps are still lower than they were two years ago.
Yum can probably use a strong fourth or even a fifth concept to help it ride the fast-casual trend that's eating into the performance of the fast-food industry. Taco Bell may be a haven of cheap Mexican staples, but with Chipotle Mexican Grill (CMG) and Qdoba growing a lot faster, it should be exploring a similar assembly-line concept with better quality and higher price points.
KFC is the largest player in its niche, but it can't escape the stigma of the unhealthiness of fried chicken. With the success of Pollo Loco's (LOCO) IPO last year, a strong rotisserie chicken concept wouldn't hurt. Pizza Hut is its weakest player, at a time when even Chipotle is cultivating a fast-casual spin on pizzas with its nascent Pizzeria Locale concept.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check outour free report.