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Yum! Brands: Heading Towards Downward Scenario

 February 06, 2013 09:10 AM

(BY Mani) Yum! Brands, Inc. (NYSE: YUM) is heading towards the downside scenario as its Chinese woes are showing no signs of abatement.

Shares are down about 4 percent Tuesday after it guided full year 2013 adjusted earnings per share to decline in mid-single digit percentage as compared to full year 2012. In November, the company said it expected to deliver at least 10 percent adjusted earnings per share growth in 2013.

But, now it no longer expects to achieve EPS growth in 2013 due to continued negative same-store sales in China and would take time to recover consumer confidence in the region.

[Related -Yum! Brands, Inc.(NYSE:YUM): An Attractive Stock To Own Given Potential EPS Growth]

Yum! Brands operates a worldwide system of over 36,000 quick-service restaurants in over 100 countries. The company's three largest brands are KFC, Pizza Hut, and Taco Bell. Approximately 75 percent of profit is generated from international markets, the largest of which is China.

Louisville, Kentucky-based Yum! Brands gets more than 40 percent of its profit from China, where the restaurant chain's reputation got hammered after negative publicity surrounding a probe by the Shanghai FDA into poultry supply management at its Chinese division.

The investigation was prompted by a report broadcast on China's national television on Dec. 18, which showed that a few poultry farmers were ignoring laws and regulations by using excessive levels of antibiotics in chicken. Some of the bad-product was purchased by two poultry suppliers of KFC China.

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Total revenue for the company's all-important China division rose 14 percent to $2.14 billion in the fourth quarter and accounted for about 52 percent of the total quarterly sales of $4.15 billion. However, the division's same-store sales for the quarter fell 6 percent.

If Chinese comps did not improve, it would be a cause for the company as its peers may eat into its market share. Moreover, China is a big market and opening of more restaurants could lead to long term growth prospects.

Currently, there are approximately 300 million potential consumers in China, and is predicted to double in the next 8-9 years on population growth. Unlike its nearest peer, McDonald's (NYSE: MCD), which built most of its China restaurant locations in Tier 1 and 2 cities, Yum has expanded throughout the country.

The company plans to offset the near-term sales pressure from China by focusing on its international units, especially emerging markets that represents a robust 50 percent of the international unit's profits and could approach 60 percent by 2015. The business could build 950 plus units in 2013 and out of that about 90 percent will be franchised, which is accretive to margins and enhances cash generation.

Fourth quarter revenue for Yum! Restaurants International unit increased 1 percent to $1.034 billion, and the division's same-store sales for the quarter grew 3 percent.

But, unless Yum! shows improvement in China it would be difficult for the company to deliver earnings growth. iStock believes that investors should remain on the sidelines unless the air around China gets cleared or the company finds a way to boost U.S. and international business.



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