Fast Food And The Chinese Debacle

| About: Yum! Brands, (YUM)

Yum! Brands (NYSE:YUM) is the world's largest restaurant chain company with more than 39,000 restaurants over 125 countries. Out of the total, 77,00 restaurants are owned by Yum! and 31,600 are franchised or licensed.

Approximately 14,700 Yum! Restaurants are outside the U.S. Due to the bird flu outbreak in China, Yum! sales were affected, but now it's recovering from this recession. The company is consistently increasing its dividend and creating shareholder value.

China trouble

In the past few months, Yum! sales in China have faced a decline due to the bird flu outbreak. Yum! was also affected because Chinese media accused KFC of using chickens full of hormones and antibiotics. The bird flu outbreak resulted in 37 deaths as of May 29, and the Chinese economy suffered a loss of $6.5 billion.

KFC has now started recovering from this trouble that started in November 2012. The Chinese market is crucial to KFC and Yum! Brands. Yum! is the parent company of KFC, Pizza Hut and Taco Bell.

With more than 5300 restaurants of KFC, Yum! generates more than half of its revenue from China. In the month of May, Yum! reported a 19% decline in its Chinese restaurant sales in comparison to the 36% drop in April. KFC China sales increased 25% in comparison to the 36% decline in the month of April, while Pizza Hut's sales in China improved by 12% compared to the 5% increase in April.

Yum!'s first-quarter total revenue declined by 7%, from $2.74 billion to $2.54 billion a year ago. Due to the decrease in sales in this region, the total first-quarter profits dropped to $337 million from $458 million a year ago. During the quarter, Yum! opened 380 new restaurants out of which 88% were in emerging markets.

It is not only KFC that is struggling in China. McDonald's Corp. (NYSE:MCD) also faces a sales downturn in this region. McDonald's is the world's largest chain by revenue and has a total of 34,500 branches globally, including more than 14,100 in the U.S.

According to McDonald's, the Chinese market only contributes 3% to its total operating income. This is the reason the Chinese issue has a comparatively lesser impact on McDonald's. Both Yum! Brands and McDonald's have a significant presence in China. Yum! has more than 4000 KFC's and 750 Pizza Huts while McDonald's has more than 1,500 outlets throughout China.

International expansion

Beside Yum!, McDonald's and Burger King Worldwide (BKW) are also planning to expand their worldwide network. Burger King is the world's second-largest fast food chain that has expanded its menu offerings from burgers, french fries and milkshakes in 1954 to a large diverse set of product offerings. It now aims to increase its total stores in Japan from 60 to 300 by 2017.


Despite the sales decline in China, Yum! Brand valuations surged more than 3% this year. It declared a dividend of $0.335 per share in the first quarter and has a payout ratio of 44.44%. The company has consistently increased its dividends and will continue to grow, making more shareholder value along the way.

Its current PE on trailing twelve month basis is 22.13, which is below the restaurant industry average of 47.18. This shows that the company is trading at cheaper valuations.


China is the biggest market for Yum! Brands. After facing troubles in China, its sales are improving every month and are expected to increase further in the second half of 2013. The brand strength will help retain its customer and will help maintain and inflate its profitability in the long run. I believe Yum! will recapture its sales and will be able to provide strong revenue growth and earnings in the future. This makes it one of the best investments in the restaurant industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Equity Whisper is a team of analysts. This article was written by our Consumer Analyst. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.