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Must-know: What isn’t working right for Yum! Brands

Amit Jhaveri

Must-know: Yum! Brands quarterly overview 2Q14 (Part 10 of 13)

(Continued from Part 9)

What isn’t working right

Yum! Brands (YUM) acquired the Little Sheep chain of restaurants in 2012. According the Yum! Brands, the performance has been a “major disappointment” since its acquisition in 2012.

For the 2Q14, the restaurant margin from Little Sheep diluted China’s restaurant margin by 0.6%. The management has stated that if these results continue to disappoint, it may have to impair the business further.

China’s sales growth

Although China’s division seems the strongest, the segment sales growth is declining. The previous chart shows the year-over-year (or YoY) sales growth, which has a declining trend over eight years. Needless to say, the Yum! Brands’ China division is constantly under fire due to food safety issues, resulting in spikes and dips in the sales. However, a long-term declining trend is concerning for its most important market.

During the second quarter earnings  call , the company stated that it experienced a “significant decline in high-check family visits.” However, its premium—higher priced items—helped average check to mitigate the downside. However, the success of this strategy is questionable with management lowering its guidance for the second half of 2014, which would result in softer sales.

Ad campaigns

From time to time, the company runs a promotional campaign around current events. In the second quarter the company ran a Brazilian-Samba themed promotion around football theme.  However, it failed to deliver the expected results according to the CEO. Burger King (BKW) also ran a similar campaign around the soccer World Cup  theme in 2014. Running ads around a current theme is a common practice to boost sales in the restaurant industry. McDonald’s (MCD) ran a promotional campaign during the Olympics in 2012. An investor looking to invest in the restaurant industry can do so by investing in exchange-traded funds (or ETFs) like the PowerShares Dynamic Leisure and Entertainment ETF (PEJ) and the PowerShares Dynamic Food and Beverage ETF (PBJ).

Continue to Part 11

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