Yum Brands’ (NYSE:YUM) efforts to turnaround its beleaguered China division, which has been hurt by concerns about the safety of its food and growing competition from local rivals, are continuing to move slower than the company and Wall Street would like.

The poor performance in China, where Yum has more than 6,000 stores, mostly KFC chicken restaurants, pushed down net income of the Louisville-based chain by 68% in the most recent quarter to $152 million, or 33 cents a share, from $471 million, or $1 per share, a year earlier. Excluding one-time items, profit was 85 cents, lagging the 92-cent average estimate of analysts compiled by Bloomberg.   Revenue fell 4% to $3.47 billion.

Yum spokesman Jonathan Blum told Bloomberg that while Chinese consumers’ trust in the company while rebounding “it’s not exactly back to where it was.”

Considering that China same-store sales, a key metric of retail performance of stores opened at least a year, fell 11% in the quarter, Blum may have understated the problem, particularly since local chains appear to be gaining ground as well.  Yum hasn’t thrown in the towel in China yet and opened 132 new locations in the third quarter.  The company also expects its China operation to “bounce back” in 2014.  Whether that forecast proves optimistic remains to be seen.

Emerging markets were a bright spot for Yum. Sales in Thailand, for instance, have gained 12% so far this year, while Russia saw a 49% gain.  These markets, though, are dwarfed by the declines in bigger markets such as the U.S. where same-store sales were flat in the quarter. The strength in Taco Bell, which rose 2% wasn’t enough to overcome the 1% decline at Pizza Hut and the 4% drop-off at KFC. Increased promotional activities pushed own restaurant margins by 0.7 percentage point.

Yum’s problems in the U.S. aren’t unique. Rival McDonald’s (NYSE:MCD) has been struggling to attract both budget-conscious consumers who are attracted to its Dollar Menu and people with more cash to spend on premium priced products such as fancy coffee drinks. Other fast food chains including Burger King (NYSE:BKW) and Wendy’s are in a similar predicament.

Though CEO David Novak is asking investors to be patient, oftentimes those pleas don’t fly on Wall Street.  Some may seek to break up Yum.  This is an idea that is backed by Jim Cramer on CNBC and makes sense.  The company’s international business is growing faster than its U.S. operation. It also has some precedent in the restaurant industry.  Wendy’s (NYSE:WEN) unloaded its poorly performing Arby’s chain in 2011.   

Taco Bell would attract interest from investors given the success it has achieved with Doritos Locos tacos. Taco Bell has sold more than 300 million of the menu item, making it one of the most successful new fast food product launches in a while.  Some bloggers even noted that the taco has almost “single-handedly created 15,000 jobs.”  Yum plans to add 2,000 new U.S. Taco Bells over the next 10 years.

Pizza Hut and KFC, though slower growers would attract interest from outside investors since they are among the most valuable brands in the world, according to Interbrand.

The Bottom Line

The uncertainty about Yum’s future makes this an ideal time to buy the stock.   Shares of the restaurant company fell more than 6% Wednesday and have barely budged for the year. The stock trades at 17% discount to its average 52-week target of $77.86.  Shares of Yum won’t stay this cheap for long. 

Disclosure -  At the time of writing, the author did not own shares of any company mentioned in this article. Follow him on Twitter@jdberr and at Berr’s World.

Related Articles
  1. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  3. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  4. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  5. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  6. Stock Analysis

    Why Has McDonald’s Been Struggling Lately?

    Learn what has caused McDonald's, the nation's largest fast food chain, to be thought of as a last resort option for modern consumers.
  7. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  8. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  9. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  10. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!