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Yum! Brands has gained particular traction from its new breakfast menu at Taco Bell.
As we approach the anniversary date of Yum! Brands' announcement of a second food scandal in as many years, you would never know it is still suffering aftershocks from the debacle. Shares are 30% higher from that low point, and while the stock was falling sharply before that news based on a relatively weak earnings report, today it stands 10% north of even that high point.
In the midst of this hullaballoo, here are the top five things the restaurant operator wants shareholders to keep in mind.
1. China remains weak, but it's improving
While systems sales dropped 6% in the quarter and same store sales declined 12% in China for the quarter, everywhere you look there were improvements. Restaurant margins, for example, dropped 4.5 percentage points to 18.9%, but considering how sales had unraveled in the country they held up remarkably well.
Operating profit, though, is another matter, declining 31% year over year.. But with customer perception of the brand continuing to improve it remains confident of delivering at least 10% growth in per-share earnings for the year.
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Yum! Brands CEO Greg Creed said that as pleased as he is with the gains made in store productivity and their ability to bounce back through the rest of the year, it's more important that the company "continue to develop new restaurants with confidence laying the foundation for future growth in the world's fastest growing economy."
2. Taco Bell is becoming a breakfast powerhouse
Rival McDonald's might still be the leading chain in the breakfast daypart, but Yum! Brands is making significant inroads and thus likely stealing market share.
System sales at Taco Bell increased 9% on the strength of a 6% increase in comparable sales and 3% unit growth, built on the back of its breakfast platform. That helped the chain'srestaurant marginat approach 20%.
Key to Yum! Brands success has not been just in marketing that Taco Bell serves breakfast, as that would fail to move customers in large enough numbers, but rather by marketing specific products. The A.M Crunchwrap and the Taco Waffle remain consumer favorites.
CEO Creed said, "By all measures Taco Bell continue to go from strength to strength and I'm thrilled to see the team take the brand to a whole new level."
In both foreign markets and here at home, chicken joint KFC is growing.
3. KFC is growing, and is expected to grow more
Chicken joint KFC system sales rose 8% on a 5% increase in comps, with operating profit rising 11% from last year. The chain is opening new restaurants mostly in emerging markets such as Russia where, absent currency fluctuations, sales surged 50% higher.
The U.S. KFC business is also firing on all cylinders, turning in its best same-store sales growth performance in almost a decade, up 7% from the year ago period.
"Simply put, KFC is a franchise led global powerhouse with a significant lead in many emerging markets and tremendous growth ahead," Creed told analysts.
4. Pizza Hut remains a sinkhole
Every silver lining needs a cloud, and for Yum! Brands the division raining on the parade is Pizza Hut, where business is softening and the competition is, well, eating its lunch. System sales there grew only 2%, and that's only because Yum! Brands opened more stores. Comps in the quarter were flat and operating profit fell 2%.
Yum! Brands credits much of Taco Bell's success from insights gleaned from marketing firm Collider Lab, which the restaurant operator purchased outright. The first order of priority of this new in-house market analysis business will be turning Pizza Hut around.
Creed said, "Because better consumer insights is one of our key priorities we decided to bring Collider in-house. Its very first priority will be Pizza Hut in the U.S."
Somehow giving customers 2 billion options on their pies hasn't helped Pizza Hut grow sales. Photo: Joe Monin.
5. India just keeps going from bad to worse
Thank goodness the India division is the smallest of all because sales there keep tumbling. While system sales rose 1%, comparable sales plunged 11%. Unit growth in the quarter was 18% and operating losses widened to $4 million from $3 million a year ago.
The company now has 833 restaurants open in the country, 53% of which are Pizza Hut restaurants and 47% KFC (there are seven Taco Bells in India as well). With quarterly revenue of just $22 million, the impact is negligible -- total revenue for Yum! Brands for the quarter was $2.6 billion -- but the restaurant operator still plans on making India a key focus of future investment.
What all this means for investors
Yum! Brands' stock has had strong upward momentum as it became apparent the food scandal would hurt, but the effects would not be long-lasting. The stock was cheap, and the chain remained a strong global brand.
But at 40 times earnings and 22 times estimates, shares are no longer cheap, and investors might want to wait for a better price before pulling up a seat at this buffet of restaurants brands.
The article 5 Things Yum! Brands Management Wants You To Know originally appeared on Fool.com.
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