From time to time, we like to check back in with our senior restaurant industry analyst,
Ann Northrop, CFA, to find out where the strengths and weaknesses within this market are likely to be found in the near term.
What's new in the fast-food, or quick-service restaurants [QSRs], under your coverage?
Well, this may not be very new, but it's still substantial: after two failed attempts, Nelson Peltz, Chairman of Triarc (TRY), the franchisor of Arby's restaurant chain, was able to strike a buyout deal with Wendy's (WEN). Under the agreement announced April 24th, Wendy's shareholders
will receive 4.25 shares of Triarc Companies for each share of Wendy's they own. This equates to $28.18 per share at Triarc A shares current price, an 11.8% premium to Wendy's share price at the close the day before the announcement. On June 2nd, the Federal Trade Commission approved the deal and it is expected to close in the second half of 2008.
Are you seeing any QSRs making strides internationally, in places such as China?
Actually, yes. Shares of Yum! Brands (YUM) are a great way to gain exposure to China's booming economy as well as other fast-growing international markets, while investing in the only stable segment of the restaurant industry, QSRs. Yum! Brands' two overseas divisions - which represented 50% of 2007 revenue - are expanding rapidly.
China, which accounted for 20% of 2007 revenue, and Yum Restaurants International (YRI) are on track to grow operating earnings by an average compound annual growth rate of 20% and 10%, respectively, over the next five years. The U.S. operations (50% of revenue) are also showing signs of revival as same-store sales turned positive in in the first quarter of 2008. This was after suffering the effects for several quarters of Taco Bell's 2006 E. coli incident and KFC's New York City rat infestation in February 2007.
The company plans to introduce new products, including beverages and value menus at all three of its U.S. brands - KFC, Taco Bell, and Pizza Hut - which we expect to bear fruit, although we think improvement will be slow and gradual.
How has growth been for Yum! Brands in China and elsewhere so far?
Revenue for the China division increased 52% year over year to $520 million in the first quarter. Operating profit increased 32.9% to $101 million led by growth in Mainland China. Mainland China's 1Q08 same-store sales increased 12%. However, company-owned restaurant margin shrank 160 basis points to 21.3% in the quarter from 22.9% in the previous-year first quarter, primarily due to high food cost inflation.
