If they gave gold medals for the power of positive thinking, Yum Brands (NYSE:YUM) CEO David Novak would surely be a winner. Before the company's recent analysts' day, he asked a group of cynical investment professionals to join him in delivering the "Yum Cheer", which is as hokey as it sounds. Though, they joined him in spelling out "Y-U-M", Novak, who has been CEO since 2001, unfortunately, hasn't had much to celebrate in 2013, a year which bluntly called "humbling."
Shares of the Louisville-based parent of KFC, Pizza Hut and Taco Bell have gained about 12% this year, underperforming the broader S&P 500 Index, which rose 25% because of concerns about the company's struggling business in China, whose 6,000 or so restaurants account for about half of Yum's overall revenue. Most of Yum's locations in the world's most populous country are KFCs, which have been dogged by concerns about the overuse of antibiotics in their chicken. The impact of these worries on the restaurant operator's bottom has been huge. Yum expects to post a decline in earnings per share this year for the first time since at least 2002. Same store sales in China are expected to plunge "in the mid teens."
Nowak, understandably, doesn't want to dwell on the past. In his remarks, he promised better times ahead with double-digit EPS growth in 2014 and going forward.
"We are very excited about the future we have in Yum Brands," Novak said.
His optimism was echoed by Sam Su, Yum's vice chairman who is in charge of the company's China business. Among the topics he covered in his talk were the gains in efficiency the company has achieved at its Chinese KFCs. Yum's Pizza Hut brand also is gaining traction in China as well and the company also planned to unveil "innovations" which Su has high hopes for but declined to describe in detail. The company, which plans to add several hundred stores in China next year, is showing no signs of backing down.
"We are well-integrated into daily Chinese life," he said. We are down but definitely not out."
Their enthusiasm, however, is not shared by Wall Street. The average 52-week price target on Yum is $76.97, about 3% higher than where it recently traded. It also trades at a price-to-earnings multiple topping 31, well above McDonald's (NYSE:MCD) multiple, which is about 17. McDonald's also trades about 9% under its average 52-week price target of $103.62 and pays a better dividend yield of 3.3% to Yum's 1.9%. Neither Burger King (NYSE:BKW) nor Wendy's (NYSE:WEN) has attractive valuations or dividend yields worth investors considering.
Yum's Chinese KFCs remain an area of concern. The company has begun a new ad campaign dubbed "I commit" which Su argued was helping Yum win over skeptical Chinese consumers as it tightened standards for suppliers. A recent Reuters report, however, paints a different picture. A whopping 40% of respondents from an online poll of 1,000 Chinese consumers conducted by ConsumerEdge Research said they were still "very concerned" about the use of antibiotics in KFC chicken. In fact, the campaign may be backfiring.
"This strategy just risks fanning the flames rather than letting people forget about it," said Yu Kaixin, 24, a recent university graduate from Shanghai, in an interview with the wire service.
For his part, Novak brushed off these concerns and Wall Street was heartened by the company's unexpected gains in China same-store sales in November. Unfortunately, those gains were driven by a half-price KFC bucket promotion. When that deal ended, sales plunged 8% for the rest of the month.
Even under the best of scenarios, Yum's road ahead is tough. For one thing, rising competition and tough economic conditions has stunted growth in the U.S., Yum's home market. U.S. same store sales were flat in the most recent quarter as gains in Taco Bell were offset by drop-offs in Pizza Hut and KFC. High promotion costs eroded restaurant margin by 0.7 percentage points. Rivals such as McDonald's, Wendy's, and Burger King are all facing cash-strapped customers with varying degrees of success. Like Yum, McDonald's is struggling to boost sales and has disappointed Wall Street lately along with Wendy's. Cost cutting and the introduction of lower-calorie French fries bolstered the performance of Burger King.
The Bottom Line
Yum Brands may be the corporate equivalent of the Boston Red Sox, who won the World Series in 2013, a year after a disastrous 93-loss year. That was the type of "bounce back" year that Nowak, and other CEOs would love to have. But climbing from "worst to first" doesn't happen that often and when it does it requires a lot of luck, which Yum hasn't had much of lately. Challenges abound for Yum. For now, the stock is too expensive and risky to buy. But it is one that investors should put on the back burner for now because there just isn't enough data available to show if Novak will back up his words with deeds so that investors will have something to cheer about as well.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.