For the fourth quarter that ended in December 2013, Yum Brands, Inc. (NYSE:YUM) beat the EPS estimate, but missed analysts' forecasted sales by millions of dollars. The discussion in this article will compare the company's performance against the consensus estimates, the future outlook of the company, and the decision to invest.
In the earnings release, the company reported revenues of $4.18 billion compared to analyst estimate of $4.26 billion. Per share earnings of the company were $0.70, much lower than what analysts had projected. However, Yum's per share earnings figure rose by 16 cents when the impact of special circumstances is excluded. Thus, the adjusted EPS of the company exceeded analyst estimates by six cents and equaled $0.86 compared to the estimated figure of $0.80 per share. Compared to last year, EPS of the company showed an increase of about 3.6%.
Analysts were expecting lower sales and profits for the quarter owing to the challenges faced by the company in China. Since China is a large contributor to the revenue base of the company, a healthy sales growth in the region is of vital importance to the overall profitability of the company. Although the sales growth has slowed down in the region, the company still performed better than what the consensus estimates indicated. The net profit margin of the company stumbled by 4.7% as reported in the recent quarter's report.
During the recent quarter, same store sales in China slumped by 4%, owing to the avian flu resurgence as winters prevailed. The 2013 revenues of the company stalled enormously in China owing to the outbreak in the region. The epidemic has resulted in 56 deaths so far, and has afflicted 246 people up till now. This repelled Chinese consumers from chicken consumption and hurt Yum's top line. Yum previously tackled the problem by taking control of its poultry, but changing the perception of its consumers regarding its chicken menu items is not going to be easy after the reoccurrence of the fatal disease.
To further add complications, Shanghai has banned chicken sales for a period of three months, with Hong Kong following in its footsteps by putting a three week ban on chicken sales coupled with a 20,000 bird slaughter. Yum has been fighting the deteriorating brand image, and the quality of its chicken to no avail. I say this because KFC's sales have continued to drop, minus the impact of sales promotions, even though the company took notice of the problems and attempted to resolve the issue quickly.
As far as Pizza Hut's sales in the region are concerned, they dropped by about 3%.
Despite the challenges faced, the company plans to continue to open more restaurants in the region and hopes for an increase in its margins. I do not see a reason for the profit margins of the company to receive a positive boost from China any time soon.
Where China shows a bleak outlook for the company, India is the brighter side. With a rapidly growing middle class and rising trends in chicken consumption, the country is highly likely to precipitate growth in the future profit margins of the company. The Indian middle class is expected to reach 200 million by 2020 and 475 million by 2030.The growth in the middle class will translate into higher spending levels.
Yum plans to open 150 restaurants in India this year and hopes to increase its restaurant count in the region to 1,000 by 2015. In addition to KFC and Pizza Hut, Yum is on course to inaugurate its first Taco Bell restaurant in India.
However, compared to what the company is doing in China, its focus on the Indian market is close to nothing. If the company wants to continue to beat analysts' expectations and generate positive future returns, I believe that the company needs to invest more heavily in the Indian market and should increase its efforts. As of today, Dominos (NYSE:DPZ) dominates the market in terms of market share. However, Pizza Hut's brand image will prove to be a plus in leveraging Yum's future sales.
In the wake of the challenges faced by the company in China, I do not see profit recovery any time soon. Considering the fact that more than 50% of the revenues of the company are generated from the China, any ups and downs in the market will have a direct impact on the top and bottom lines of the company.
I am not pleased with Yum's current pace of investment in the Indian market. India is a high growth market and deserves a higher level of investments to be made. However, Yum does plan to ramp up its investment in the region following 2014.
The company announced a positive outlook for the current year and hopes to bring about a 20% growth in its EPS this year. This, however, seems hard to achieve. In my opinion, any growth brought forth through sales in the international markets will be offset by the disappointing performance in China. I expect the price of the stock to depreciate in the short term. However, Yum will become a buying opportunity in the long term considering the company's investments in the Indian region. As the sales begin to pick up in India, the margins of the company will rise again.
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.