Yum! (YUM) Faces Challenges in China, But Growth Potential is Still Robust
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Yum! Brands, Inc. (NYSE: YUM) shares are trading higher Tuesday following a bullish report from the WSJ about the company's prospects in -- of all places -- China.
For Yum!, China has some very juicy numbers: 50 percent of Yum! profits in 2011 came from China, the region had 14 percent first-quarter comp gains, and there are only 4,500 stores in the market.
On the store count, Yum! and country data show there are about one for every $1.6 billion of China's GDP. In the U.S., the dilution is about one store for every $836 million of GDP. In the first quarter, Yum! opened 168 new units in China.
Bears on the stock will likely look at competitor McDonald's (NYSE: MCD), which recently reported a drop in May comps due in part to negative growth in China. In addition, wages in China rose 17 percent from last year and chicken prices are up 7 percent. The first quarter saw Chinese restaurant margins compress by about 150 basis points to 23.6 percent.
In terms of foreign exchange translation, Yum! saw a 5 percent upside benefit in 2011 due to a higher yuan. The depreciation in the currency will likely have an impact on operating profit.
Despite some of the challenges, however, investors with a longer-term outlook are doing some finger lickin' and stock buyin' as the potential to double locations -- and double profits -- still remains the top-item on the menu.
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For Yum!, China has some very juicy numbers: 50 percent of Yum! profits in 2011 came from China, the region had 14 percent first-quarter comp gains, and there are only 4,500 stores in the market.
On the store count, Yum! and country data show there are about one for every $1.6 billion of China's GDP. In the U.S., the dilution is about one store for every $836 million of GDP. In the first quarter, Yum! opened 168 new units in China.
Bears on the stock will likely look at competitor McDonald's (NYSE: MCD), which recently reported a drop in May comps due in part to negative growth in China. In addition, wages in China rose 17 percent from last year and chicken prices are up 7 percent. The first quarter saw Chinese restaurant margins compress by about 150 basis points to 23.6 percent.
In terms of foreign exchange translation, Yum! saw a 5 percent upside benefit in 2011 due to a higher yuan. The depreciation in the currency will likely have an impact on operating profit.
Despite some of the challenges, however, investors with a longer-term outlook are doing some finger lickin' and stock buyin' as the potential to double locations -- and double profits -- still remains the top-item on the menu.
Join StreetInsider.com FREE and get immediately alerted when news breaks on your stocks and other market items - JOIN NOW
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