Why Yum! Brands’ net profit margin decreased in 3Q14

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Oct. 27 2014, Updated 1:00 p.m. ET

Summary

So far, we discussed the performance of Yum! Brands’ (YUM) key drivers—like same-store sales, unit growth, and management’s initiatives. In this part of the series, we’ll discuss how the drivers translated into the company’s bottom line performance.

For the company, the overall net income before extraordinary items grew 3% year-over-year (or YoY). However, the net profit margin declined slightly by 42 basis points to 14.23%. It’s important to note that 100 basis points = 1%.

Yum Net Income vs Margins 2014-10-18

Segment performance

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Same-store sales were -14%. This was due to a 17% decline in transactions in the China division. This resulted in a 14.6% decline in restaurant margin compared to the same quarter last year. The company did benefit from its previous pricing initiatives. However, this was offset by 10% labor inflation. It was also influenced by an inventory write off in connection with OSI’s products. You can learn more about Chinese wage inflation here.

Remaining divisions

  • The Kentucky Fried Chicken (or KFC) division reported 3% sales growth. It had an operating income of $169 million. It had a 30% profit margin. According to the earnings release, profits grew 14% year-over-year (or YoY).
  • The Pizza Hut division reported a same-store sales decline of 1% YoY. It saw a decline in operating profits by 6% YoY. It reported an operating income of $68 million in 3Q14. Its competition with Domino’s Pizza (DPZ) had an overall domestic same-store sales growth of 7.7% in 3Q14.
  • The Taco Bell division reported a 3% growth in same-store sales. It had an operating income of $124 million. It experienced operating profit growth of 14% YoY.
  • The India division reported a same-store sales decline of 4% YoY. It experienced an operating loss of $3 million in the quarter—compared to an operating loss of $4 million in the same quarter last year.

If you want to invest in a broader restaurant portfolio, you should consider the Consumer Discretionary Select Sector SPDR (XLY). XLY holds stocks in restaurants like McDonald’s (MCD) and Chipotle Mexican Grill (CMG).

In the next part of the series, we’ll discuss how investors reacted to Yum! Brands’ earnings.

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