Friday, November 1, 2013

This Struggling Fast Food Giant Is Targeting 20% Earnings Growth

By Sarfaraz A. Khan and Gohar Yousuf

Yum Brands continues to struggle in its primary market, China, and is expecting a challenging fourth quarter but the management remains undeterred; will continue to invest heavily in its long term future in the country. 

Yum! Brands (YUM), the owner of the world’s largest chain of restaurants which includes KFC, Taco Bell and Pizza Hut, is still unable to recover from the controversy that started last year following the safety violations by the company’s chicken supplier in China. Moreover, the avian flu has made things more difficult for KFC in China. Once again, the company has reported disappointing quarterly results for its Chinese operations.

In its quarterly results announced earlier this month, Yum reported net income of $152 million or $0.33 per share, which is down by 68% from $471 million or $1 per share from the same period last year. Its revenues also dropped by 3% to $3.47 billion from $3.57 billion a year ago. The significant drop in earnings is mainly due to the adverse market conditions China and higher than expected tax rates. Its earnings were also dragged by the non-cash charges of $0.55 per share related to the write down of Little Sheep’s intangible assets (discussed later in the article). However, Little Sheep is still the biggest brand in China’s casual-dining market and has the potential to make significant contributions to Yum’s earnings in the long run.

Chinese Woes Continue

Yum Brands is one of the few American companies that generated most of its income from China. In its previous quarter, Yum got 66% of its revenues and 96% of its operating profit from its China division. Naturally, the company’s success critically depends on the Chinese …. Read full article at GuruFocus