The restaurant holding group Yum! Brands (YUM) , which is the parent company of KFC and Taco Bell, issued its third quarter earnings report after the bell on Tuesday, and they were a big disappointment. The company, which owns fast food locations around the world, revealed that sales slipped in China far more than estimated, which contributed to Yum falling short of overall revenue projections.
Yum reported a same-store drop of 11 percent in China, where the company does over half of their business. While they experienced an increased presence in emerging markets, sales were flat in the US, and operating profit in China fell 14 percent.
In China alone, Yum owns 4,463 KFC franchise locations to go along with 953 Pizza Hut Casual Dining and 185 Home Delivery units. Sales in that country were severely affected by a bird flu scare.
The company’s acquisition of Little Sheep was of further concern for Yum. The Mongolian “hot pot” restaurant chain came under Yum’s control in 2012, and since then has lost significant amount of money. Yum reported a special $258 million net impairment from the acquisition of Little Sheep.
For their third quarter 2013 earnings report, Yum! Brands reported a net gain of $152 million, or $0.85 per share, versus the net gain of $471 million, or $0.99 per share, from the same period a year ago. Revenue for the quarter was $3.46 billion, as compared to $3.6 billion from the previous year. Analysts were expecting a net gain of $0.93 per share on revenues of $3.53 billion.
The United States is the country that brought the world fast food. Or at least fast food of the greasy, sub-standard cheeseburger or fried chicken variety. Chains like McDonalds (MCD) , Burger King (BKW) , and Kentucky Fried Chicken (YUM) have become global, with locations popping up across the planet. They’ve become a symbol of America that’s spread far and wide, and they’ve provided investors with consistent returns. McDonalds has given returns approaching 300 percent over the last decade, and YUM! Brands (the owner of Kentucky Fried Chicken as well as Taco Bell and Pizza Hut) is up over 350 percent over that same period. And that doesn’t factor in their dividends of 3.43 percent and 2.07 percent respectively.
McDonalds (MCD) Stock on a Pleateau?
That’s why the relatively flat performance of these stocks since the start of 2012 stands out. Since the start of 2012, McDonalds is down almost 6 percent. YUM!, meanwhile, is up over 20 percent over that period. But that includes a rapid rise that peaked on April 20th of last year. If you go from May 1, 2012, YUM! is down over 2.5 percent.
Certainly, with a healthy dividend and a strong history of performance, it could be a serious mistake to overstate the importance of less than two years of performance. However, it’s also hard to ignore over 18 months of stagnation for the two biggest players in the segment. And in this case, it could also point to a larger underlying trend that means trouble for the biggest fast food chains.
Food culture in America is changing, and it isn’t hard to spot the trend. The Food Network (SNI) has gone from its launch in 1993 as a small, niche channel to reaching nearly 100 million homes. With it has come the major success of food oriented shows on the Travel Channel, Bravo, and the major networks. Last year, there was a 10 percent jump in the number of FDA registered farmers markets to 7,864. In 1994, there were 1,744, meaning the number’s jumped over 350 percent in just under 20 years. And grocery stores catering to more selective customers are showing tremendous growth. Since the start of 2009, Whole Foods Market, Inc. (WFM) is up over 1200 percent. On the whole, the rapid expansion of food culture in the United States has changed the way many people are eating and getting their food.
But how might this bleed over into the market as a whole? A handful of urban foodies aren’t going to alter broader industry trends that much, are they? That’s the question that’s been driving many industry-watchers for years, and the conclusion of many appears to be leaning towards yes. And one of the primary factors pushing them that way is the success of higher-quality fast-casual restaurants.
Chipotle (CMG) Leading the Way
One of the most interesting stories in this regard is Chipotle Mexican Grill (CMG) , regarded by many as a benchmark for this new breed of fast-casual restaurant. And it’s not without irony that Chipotle’s success was made possible by McDonalds, which began investing in the Denver-based chain and its 16 locations in 1998 after it had been in existence for just five years. By 2006, when McDonalds divested itself from the company, it had over 500 locations across the country and McDonalds had turned its initial investment of $316 million into $1.5 billion. A tidy profit that came as McDonalds was making an effort to divest itself of all its other holdings to focus on its core business.
However, it may be Chipotle that has the last laugh. Coinciding with the relative stagnation of McDonalds shares has been a meteoric rise for Chipotle’s. Since reaching a 52-week low in October of last year amid shareholder lawsuits over potentially misleading statements from the restaurant’s leadership, shares have exploded to the tune of an over 70 percent gain since November 1, 2012.
And it’s not hard to see why Chipotle is so popular. In many ways, the traditional fast food industry, long a bastion of the convenient and inexpensive meal, has been exposed. Because Chipotle’s offerings manage to remain relatively inexpensive ($6.50 for a chicken burrito) while offering a product made with fresh ingredients that offers clearly superior quality. And this comes without a tremendous disadvantage for Chipotle in terms of convenience.
Not Your Grandfather's Fast Food Restaurants
If Chipotle were the only new face on the block, McDonalds really wouldn’t have much to worry about. Personal preference can’t be defined clearly, and for every person more than happy to pay an extra dollar or two and wait in line an extra few minutes for fresher, higher-quality food, there’s bound to be plenty who just don’t like burritos. Or just prefer McDonalds. However, Chipotle may be the most visible company in this segment, but it’s not alone.
Noodles & Co. (NDLS) held its IPO on June 28 and saw shares immediately skyrocket just under 30 percent over the next two days. The company, which serves a wide variety of noodle dishes from around the world for prices as low as $6 a bowl, has lost some ground since its peak but remains 20 percent over its IPO value. Panera Bread Co (PNRA) has struggled over the last year, but is still up almost 250 percent over the last five years. Potbelly Corp. ($PBPB) shot up after its IPO on Friday and has settled into gains of 5 percent after its second day of trading. And Chipotle’s re-entering the space with its second chain, the Asian-themed Shop House.
And with more and more options available, customers have a lot of variety in their choices, potentially drawing away even more of McDonalds’ potential customers. And for those observing that none of these companies is directly challenging McDonalds in serving burgers and fries, the privately owned Five Guys Burgers and Fries has, since beginning to franchise locations in 2003, expanded from six to over 1,000 locations in the United States and Canada with another 1,500 in development in just nine years, making it the fastest-growing fast food chain in the country. The formula for success? Once again, higher quality than traditional fast food at higher-but-still-competitive prices.
A Sign of Things to Come?
It’s clearly more than a little premature to begin writing an obituary for McDonalds. It is, after all, a $94 billion company. While it would be hasty to claim that American palettes have moved, even if it weretrue, the globalization of the brand means it would still be in a strong position. The same can be said for YUM! And, once again, a lack of growth in share price over a two-year period is hardly a reason for panic, especially when the company’s offering a healthy dividend.
But it’s hard to ignore the cultural shift in eating habits that appears to be taking place completely. And the success of chains like Chipotle or Noodles & Co., with an entirely new approach to the business, could mean that the casual dining segment is about to enter a stage of relative flux that could change the way even the giants do business.
It's that time of the month to check up on Equities.com's porfolio of funny ticker symbols. Once again, the "FUNY index" outperformed the S&P 500 with a return of 8.14 percent since August 16, while the S&P 500 had a return of 4.04 percent.
Here is a chart breaking down the performance of the "FUNY Index" during the timeframe (August 16 - September 19).
VCA Antech Inc. [$WOOF] outperformed the competition this month with the highest return of 29.17 percent. Close behind was BioTelemetry Inc. [$BEAT] who continued to grow with stock prices reaching over $10 a share.
Harley-David Inc. [$HOG] also had a solid performance this month with a return of 12.85 percent. The company decided to go ex-dividend on September 13.
In the restaurant category, The Cheesecake Factory Inc. [$CAKE] came out on top with a return of 4.15 percent. Papa Johns Int'l Inc. [$PZZA] trailed behind with a return of 3.2 percent. The pizza company teamed up with the NFL and Pepsi earlier this month to offer special promotions to sports fans. Yum! Brands Inc. [$YUM] did not see much change from last month's return.
Olympic Steel Inc. [$ZEUS] was the only company that underperformed this month with shares dropping to $26.93.
When comparing the "FUNY Index" to the S&P 500 over a longer period of time, the difference is much more significant. Since November 15, 2012 the "Funy Index" has a return that is over 40 percent higher than the S&P 500.
Here is a chart breaking down the performance of the "FUNY Index" during the timeframe (November 2012 - September 2013).
The most remarkable figure is that BioTelemetry returned a whopping 319.17 percent in less than year. In addition, 10 out of the 15 companies in the "FUNY Index" have reached a return of 40 percent or higher since November 2012. While it is never advised to base an investment on the name of a ticker symbol, the "FUNY Index" continues to impress us with its strong performance.
Equities.com continues to track its portfolio of funny ticker stocks against the performance of the S&P 500 and there have been major updates since last month’s review.
Since its inception, the “FUNY Index” has more than doubled the S&P 500 for a return of 47.77 percent, while the S&P500 had a return of 22.76 percent since the November low. Here is a breakdown of the FUNY Index during the timeframe (November 15 – August 15).
BioTelemetry, Inc. (BEAT) was the winner again this month with a whopping return of 235 percent. Biotelemetry, formally called Cardionet, changed the company name on Tuesday. The company is a developer of heartbeat monitoring technology who has soared all the way up to just around $8 per share.
Moving onto the food industry, two popular pizza chains Papa Johns, Int’l Inc. (PZZA) and Pizza Hut owned by Yum! Brands Inc. (YUM) , went head-to-head, putting their best pizzas forward. Papa Johns came up on top with a return of 47.39 percent while Yum! Brands had a return of just 4.27 percent.
However, Yum! Brands has also recouped after being down 4.54 percent last month. Over the last five years, Papa Johns has steadily gained value, jumping from around $8 per share to almost $70. Finishing up the restaurant section, The Cheesecake Factory, Inc. (CAKE) is also showing significant return, up 30.96 percent since Nov. 15. The company announced the opening of a new restaurant in Novi, Michigan on Tuesday.
Other companies that enjoyed profits during this period include Southwest Airlines Co. (LUV) , which posted a return of 52.22 percent, and OM Group Inc. (OMG) , which has improved drastically since November.
All stocks from the FUNY Index have improved since the November low. The three names--Asia Tigers Fund Inc. (GRR) , Thoratec Corp. (THOR) , and YUM! Brands--were actually down last month, but brought themselves back up, improving the overall return of the FUNY Index. However, this does not come as a huge surprise considering the S&P 500 rose by over 4 percent from last month.
Yum! Brands (YUM) shares traded after hours on Wednesday after the company missed sales estimates, but delivered an earnings beat and a positive outlook on China.
Yum reported net income of $281 million, or $0.56 per share excluding special items, versus the $331 million, or $0.67 per share, from the same period a year ago. Revenue for the quarter was $2.90 billion, as compared to $3.17 billion from the previous year. Analysts were expecting a profit of $0.54 per share on revenues of $2.93 billion.
Yum experienced a 20 percent decline in Chinese same-store sales for the quarter, which drove sales and earnings significantly lower from the previous year. However, investors reacted positively to commentary on China, where Yum earns about half its revenue.
“KFC sales and profits in China were significantly impacted by intense media surrounded Avian flu, as well as the residual effect of the December poultry incident. The good news is that China sales are recovering as expected. The extensive media surrounding Avian flu in China has subsided and same store sales at KFC are clearly improving,” said CEO David C. Novak.
With negative publicity mostly in the rearview mirror, Yum expects same-store sales growth in China to turn positive next year. The company also plans to continue its ambitious growth strategy in Asia, opening at least 700 Pizza Huts in China this year and aggressively expanding its operations in India and other emerging markets.
Domestically, same-store sales increased 1 percent, including growth of 2percent at Taco Bell and 3 percent at KFC, although same-store sales declined 2 percent at Pizza Hut. Yum was especially pleased with Taco Bell’s performance, citing food innovation such as the Doritos Locos Tacos as the driver for solid performance.
U.S. operating profit grew 4 percent, which was negatively impacted by 3 percentage points due to refranchising.
With a recovering business and China and solid performance in the U.S., Novak spoke positively about Yum’s prospects moving forward. “We expect a strong bounce-back year in 2014 as we continue to aggressively invest behind our core strategies and capitalize on the enormous growth opportunities we see around the world.”
Yum’s earnings report sent shares up 39 cents to $72.75 during after hours trading. Shares are up nine percent year-to-date and trade around two dollars short of 52-weak highs.
Second-quarter earnings season unofficially begins after the closing bell on Monday with aluminum manufacturer Alcoa’s (AA) report.
While companies such as Oracle (ORCL) and Nike (NKE) have already reported their earnings over the past week, Alcoa’s earnings are highly anticipated because the vast range of the company’s operations is seen as uniquely representative of the state of global economic growth. Analysts expect the company to reports earnings-per-share of $0.08, slightly up from the previous quarter, while revenue is expected to drop to $5.92 billion.
Overall, expectations for the Q2 earnings season that is just getting underway are low. Back in April, earnings growth for companies on the Standard & Poor’s 500 index was forecast at an average of 3.9 percent from the prior-year period, a figure which has dropped to 0.4 percent heading into the current week.
The finance sector, however, and in contrast to Q1, should be the bright spot over the next few weeks. JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) report on Friday, which will give a more concrete picture of how the sector has advanced, but expectations are high. While the first quarter saw an overall earnings increase of 7.6 percent, the recently ended quarter should see the sector’s earnings jump to 18.6 percent. JPMorgan on its own is expected to report earnings-per-share of $1.43, well ahead of the prior year period’s $1.15.
After Wednesday’s close, Yum! Brands (YUM) earnings report should provide some insight into the Chinese economy, which has been a growing source of concern for investors in recent weeks with increasing fears about a lag in growth. While the fast-food chain has a worldwide presence, its performance is seen mainly as an indicator of Chinese consumer sentiment.
An average of analyst estimates says that Yum!’s revenue will be down nearly 8 percent on the prior-year period, while earnings-per-share should come in at $0.54, a decrease of 19.4 percent, after a first-quarter during which earnings were also 25 percent lower than the same period the year before.
In terms of consumer sentiment in the US, Gap Inc. (GPS) will report its earnings on Thursday. Specialty retail alone is a limited measurement of spending trends, and the Gap has already been executing and seeing results from its shrewd implementation of a turnaround strategy over the past few quarters. The company’s stock in up over 40 percent year-to-date and almost 60 percent over the past 12 months, and it has beat earnings estimates in three out of the last four quarters.
Furthermore, Gap, like Nike (NKE), who met expectations on earnings-per-share and revenue in its report last week, has been increasingly relying on an internationalized, emerging markets-oriented strategy in order to decrease dependence on North American sales. The Gap is looking to generate 30 percent of its sales from overseas and online sales for fiscal 2013.
The tech sector is expected to have its second rough quarter of the fiscal year, with earnings forecasts dropping 8.3 percent on the prior year period, after a 4.2 percent year-over-year decrease in Q1. PC makers continue to be the tech’s softest spot.
Much like the first quarter, lower earnings expectations may help companies overall, but this first week of reports will be overshadowed to a large extent by another type of release on Wednesday, in the form of the minutes from Federal Open Market Committee’s June meeting, to be followed by another press conference from Chairman Ben Bernanke.
Investors will be anxiously watching the FOMC and Bernanke for further indications about the possibility of the tapering of fiscal stimulus beginning as early as September. Indeed, after Bernanke first floated the idea of the Fed’s cutting back on asset purchases by late-year during a press conference last month, indices dropped sharply for several days, with the S&P 500 down almost 5 percent, a loss from which it has not yet entirely recovered.
More hawkish insinuations from the Fed could undermine the ability of positive earnings data to drive stocks upwards, and could punish them more harshly in the event of underwhelming data. Ever since markets reacted frantically to the Chairman’s June 19 press conference, messaging out of regional central bank officials has been one of reassurance when it comes to the connection between continued economic growth and the tapering of bond purchases.
Last month, Equities.com explored the performance of funny ticker stocks versus the S&P 500 during the November-June bull market. The FUNY Index, thanks to strong diversification and stellar performances from Cardionet (BEAT), Southwest Airlines (LUV), OM Group (OMG), Olympic Steel (ZEUS), and others, surprisingly outperformed the S&P 500 by seven percent.
Here’s a breakdown of the FUNY Index’s performance during that timeframe:
However, the index’s performance was tracked during a tremendous bull market, underscoring the legitimacy of the sample size. Over the past month, market volatility returned amid tapering rumors from the Federal Reserve, higher interest rates, and economic slowdowns abroad. Therefore, it’s important to revisit the index to analyze how it performs during tougher times.
The following spreadsheet breaks down the performance of the FUNY Index from June 6, 2013 to July 4, 2013.
The FUNY Index, again, significantly outperformed the S&P 500. With two consecutive periods of outperformance, can we infer that there is something special about these companies? Absolutely not, but the index’s performance does carry valuable investing lessons.
The first lesson learned from the FUNY Index is the importance of steering clear of high-yielding stocks when interest rates rise. Over the past month, interest rates have gone up significantly, increasing the demand for bonds. “Safe” stocks with high dividends have suffered the most because they are widely perceived as bond-equivalents, while lower-yielding, higher growth companies have outperformed the market.
The FUNY Index performed well, in part, because Cedar Fair L.P. (FUN) is the only stock in the index with a yield above two percent. Therefore, the index didn’t selloff as much as some high-yielding utilities, master limited partnerships, and telecommunication stocks.
The second lesson from the FUNY Index stresses importance of owning at least one speculative stock in a portfolio. Cardionet (BEAT) was responsible for a huge portion of the index’s gains, after the company announced that UnitedHealth Group (UNH) would cover its heart monitoring devices to patients with Medicare and Medicaid. The stock soared over 50 percent on the news, and continued higher in ensuing days.
While it’s never a good idea to assume too much risk in a portfolio, one or two speculative stocks are more than acceptable. A positive announcement from any speculative stock can drive the performance of an entire portfolio.
While investors should never invest in a company based on its ticker symbols, investors can certainly apply these lessons to their investment strategies.
Since the recent bull market began on November 15, 2012, investors could have randomly selected a diverse portfolio of stocks and would likely be up on their money. Since that date, the S&P 500 is up 18.7% and a huge majority of stocks stocks are in the green.
But what if investors decided to invest only in stocks with funny and clever ticker symbols?
The FUNY Index is a fabricated, diversified index comprised of 15 stocks and ETFs from the NYSE and NASDAQ. Their businesses range from restaurants to animal healthcare to industrial explosives, and all 15 companies have funny or clever ticker symbols. Here’s how the index has performed since the start of the rally in November.
Surprisingly, the FUNY Index significantly outperformed the broader market. These stocks returned an average of 25.18 percent, while the S&P 500 returned 18.70 percent. The FUNY Index’s return also outperformed the NASDAQ’s 19.48 percent return and the Dow Jones’ 19.01 percent return. Only the Russell 2000 outperformed the FUNY Index, but only by a miniscule .03 percent.
Of course, the FUNY Index’s performance should never dictate an investment strategy. One should never invest in a company based on its ticker, and the Index was arbitrarily assembled without a real investment strategy.
However, the performance of the FUNY Index does carry some teaching value.
During a bull market, a well-diversified portfolio should perform strongly. The FUNY Index is comprised of large and small companies from nearly all sectors, and is therefore able to reap the benefits of a strong economy. Thanks to exceptional returns from Southwest Airlines and OM Group and thorough diversification, the FUNY Index’s performance has been outstanding during this bull market.
[Image via screengrab]
Yum Brands, Inc. (YUM) was hit with an analyst downgrades on Tuesday morning, only hours ahead of it releasing its financial report for the first quarter after the closing bell. The report stated that sales in China were impacted substantially “by adverse publicity from the poultry supply situation in late December 2012,” however earnings from the quarter handily topped Wall Street expectations.
For the quarter, Yum Brands, who operates about 5,300 restaurants (primarily Kentucky Fried Chicken locations) in China, reported revenue of $2.54 billion, down from $2.74 billion in the first quarter of 2012. Net income fell to $337 million, or 72 cents per share, compared to $458 million, or 96 cents per share in last year’s quarter. Excluding special items, Yum’s earnings were 70 cents per share, versus 76 cents per share in the year prior quarter.
Analysts were expected the company to earn 60 cents per share on revenue of $2.56 billion.
Same-store-sales in China were 20 percent lower, while increasing 2 percent in the United States and 1 percent at other YRI (Yum Restaurants International). Global restaurant margins declined by 2.7 percentage points to 15.9 percent on the back of a 7.0 percentage point fallout in China, offset in part by a 2.4 percentage point increase in the States and 1.4 percentage points at YRI.
In addition to Chinese regulators reporting in December that some of Yum’s KFC chicken in China contained excessive amounts of antibiotics, the company has also suffered from lower sales due to a new strain of Avian bird flu breaking out in the country.
Operating profit in China locations plummeted 41 percent during the first quarter. U.S. and YRI locations saw increases of 5 percent and 19 percent, respectively.
“While better than expected, the first quarter was extremely difficult for Yum! Brands,” commented David C. Novak, chairman and chief executive at Yum. “As anticipated, intense media attention surrounding poultry supply in China significantly impacted KFC sales and profit.”
Yum, who operates Pizza Hut, Taco Bell and KFC restaurants worldwide, noted that the negative media around poultry supply in China has now subsided, but added that there is “no doubt” that 2013 will be a challenging year at Yum.
Early Tuesday, Bank of America made a stark reversal in its rating of Yum, downgraded it to “underperform” from “buy” and lowered its price target from $80 to $60 per share.
Yum has pinned a lot of its growth prospective of expansion in China, a meal that is somewhat hard for investors to digest recently given the less-than-expected growth of the world’s second biggest economy and recent concerns of mutating bird virus strains.
Shares have been tossed and turned over the last year and were down about 10 percent as of Tuesday’s close at $64.15 (down 1.7% on the day). The earnings beat helped buoy shares to reverse some of those losses in extended trading, perking back upwards to $68 per share.
Yum! Brands Inc (YUM), the parent company of Kentucky Fried Chicken, Pizza Hut, and Taco Bell fast food chains announced on Wednesday that it expected to take a sizeable hit as a result of China’s recent bid flu scare.
This most recent outbreak of bird-flu, or H7N9 avian influenza, has killed at least ten people in China over the past two months alone, and left many others sick.
This most recent outbreak of avian flu is not believed to spread from person to person, but is rather carried in infected poultry. Either way, it cannot be acquired from properly cooked chicken, but this has not prevented Yum!, who have approximately 5,300 locations in world’s most populous country, from reporting on Wednesday that same-store sales at Chinese KFC outlets were down 16 percent in March, as a result of the scare.
The announcement came during late trading, causing the company’s shares to lose almost 2 percent, to $65.50.
The profit-loss resulting from this most recent outbreak is likely to end the company’s 11 year-long double-digit growth spurt. While this will be to some extent reflected in Yum’s March sales figures, the bigger drop is expected when April sales figures for China come out next month.
The Louisville, Kentucky-based company was already in some measure of trouble with Chinese consumers over reports that the company’s chicken suppliers had been feeding their stock unregulated or unapproved levels of antibiotics. Yum has subsequently cleaned up the supply chain, removing over 1,000 small chicken producers and tightening oversight.