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TheStreet Open House

There's Still Investor Appetite for Yum! Brands

NEW YORK (TheStreet) -- It's been said that "a way to a man's heart is through his stomach." This is a phrase restaurant giant Yum! Brands (YUM) knows very well.

More important, the company understands the stomach also serves as a gateway to investor profits. As with the company's Pizza Hut chain, Yum! has delivered. But it hasn't come easy.

While Yum! Brands is without question a dominant force in the restaurant business where it competes with McDonald's (MCD) and other chains, the company has had to deal with more than its share of bad publicity. That includes a China scandal involving two suppliers to the company's KFC restaurants and the safety of the chicken supply regarding the threat of avian flu, scaring off customers.

Despite these concerns, the company has persevered. The stock is still up 6% on the year and even reached as high as $72.32 on April 1, representing gains of 10%. The credit here goes to management, which has done an excellent job mitigating the damage while taking the appropriate steps to ensure consumers that the chickens (if cooked properly) were safe to eat. It's going to take more time for that message to sink in. This showed in the company's first-quarter results.

The company has made it known that China, which is the world's second-largest economy, is an increasingly important market. Yum! has made considerable investments in that region to the extent that China accounts for more than half of the company's annual sales. But preserving the company's reputation has been a struggle.


Now, with same-store sales in China falling 29% in April, the company must figure out a way to preserve its market share, especially following a 13% decline in same-store sales for March. China customers are not quite ready to forgive, which means investors must now prepare for the possibility that growth may not come back for quite some time. I believe management understands this.

For the first quarter, which ended March 23, Yum! posted 70 cents in earnings per share, which declined 8% when excluding special items. Weakness in China really took a toll here. Pperating profits plummeted 41%. This was partially offset by 19% profit increase at Yum! Restaurants International and a 5% profit increase in the U.S. division.

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