- China generates more than half of the company’s total revenue.
- The company is expected to show 1.08 EPS in the next quarter.
- An increasing number of total restaurants in emerging markets points to a healthy top line.
Yum! Brands (NYSE:YUM) has always been the first preference for investors because it operates leading brands: KFC, Pizza Hut and Taco Bell. The company is offering great quality food in its existing markets, as well as keeping an eye on the emerging markets for growth in upcoming years. Nowadays, it is investing in China and India because the company expects these two emerging markets to generate remarkable sales in the future.
The company is currently running 5827 total stores in China which generate 52 percent of total sales. It is estimated that in the future, each new store in China will generate more than $1.16 million sales annually. This growth in sales is expected to continue at an increasing pace. The company predicts it will report 52.4 percent of its total revenue from China. Total revenue is expected to be 4 percent more than last year.
The following table showcases what the company believes will be its largest revenue generation from this regional sector; the company also believes that it will expand even more. This factor is leading the company's management to focus and reserve investments for this market. China's fast food and takeaway market is expected to reach $294 billion by 2017 so there is ample opportunity for Yum! Brands to grow.
Source: 10-K Reports
In terms of sales growth India is progressing more quickly than China. Last year India reported 20 percent growth in sales, whereas China reported 5 percent growth. The company is operating 619 total stores in India. Right now India is contributing less revenue towards overall revenue, but keeping in mind the opportunities available in India, the company is definitely going to take advantage of this situation. Management is implementing its plan to open 150 new stores in India. In the long run, the company is aiming to have 2,000 restaurants in India by 2020.
In the last quarter, the company had EPS of 0.73 with $3204 million in quarterly revenues. However, it is expected that the company will have EPS of 1.08 with $3847 million revenues in the next quarter. The company's management intends to report a double digit earning per share figure by the end of this year.
The company is enriching its KFC menu in China to introduce as many as 27 new food products. This is expected to attract higher traffic and larger sales volume in Chinese KFC restaurants. Yum! Brands also plans to introduce free Wi-Fi in over 2,000 of its restaurants by the end of this year.
Broad Picture of Yum! Brands
With roughly 40% of Yum! Brands' operating income coming from China, the stock is tied to market perceptions of macroeconomic and consumer trends in the region. However, we view Yum! Brands as more than a "China story", and encourage investors to consider the potential of Yum's other divisions. As the company shifts to a brand reporting structure, it is expected that accelerated unit and same-store sales growth with margin expansion will determine the company's bright future. Although it is a U.S.-based company, it has more assets in China than in the U.S. which shows that management is availing every opportunity available in the emerging markets.
The company has more than 40,000 restaurants all over the world and each restaurant generated almost $0.32 million. This revenue per restaurant is expected to increase as the company is using strategic plans to increase the market share of KFC. Pizza Hut is also under the company's consideration because in some country's Pizza Huts are facing declining sales.
Taco Bell Breakfast Menu
Taco Bell rolled out its breakfast menu nationwide on March 27th in the U.S. Taco Bell's breakfast menu is the brand's largest and most extensive menu since it first opened its doors more than 50 years ago. This breakfast menu will be offered in more than 5500 restaurants nationwide and feature unique items such as the waffle taco, the A.M. crunch wrap and many more. This initiative will boost the company's top line in the coming quarters.
The company's payout ratio of 56 percent and ROE of 47.06 percent suggests that its sustainable growth is 26 percent. The company will show long term growth in the coming future and issue reasonable dividends for its investors.
Yum! Brands is making the right decisions by targeting emerging markets like China and India. Investing more in these two countries will give the company a secure future with rapid growth in its top and bottom lines. Cheap labor and the company's major assets in China and India will help the company to its reduce costs. A major focus on the Chinese market will increase the company's revenue share from this market to more than 50 percent in the next 2-3 years. Investors who believe in long-term growth stocks should take a bite of Yum! Brands.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.