A slowdown in the turnaround of Yum! Brands’ Chinese operations has intensified pressure on the multi-brand franchisor to split into multiple companies.
One scenario calls for jettisoning the Chinese branch of the business through a spin-off. The other route championed by investors is spinning off Taco Bell, Yum’s star brand by far, and restacking everything else into a company that might as well be renamed Challenged, Inc. In addition to problems in Asia, Yum has been struggling with a sales deceleration in the domestic operations of Pizza Hut.
Both restructuring possibilities have been floated by Wall Street numerous times before. But the cries for an unbundling have risen sharply since Yum posted jaw-dropping results Tuesday for its third quarter, largely because of the drag from China. Units there across all of Yum’s brands posted a collective same-store sales gain of 2 percent. Analysts had expected a leap of at least 10 points. Some had expected a gain of around 15 percent.
The results point to what Bank of America Merrill Lynch analyst Joe Buckley called a “major crack in China,” where Yum generates 40 percent of its profits.
With that sort of headwind, Yum’s net income for the quarter rose year-over-year by only 4 percent, to $421 million.
“We believe this disaster of an earnings release could—should! —serve as the crystal-clear call to action YUM! Brands needs to shake up the company so that it is structured much more effectively for the future,” wrote Mark Kalinowski, the U.S. restaurant analyst for Nomura Securities.
China, once the closest thing in the restaurant industry to an unlocked bank vault, has been a source of trouble for U.S.-based chains as of late. Spending has softened as the rise of a middle class slowed and competition escalated. The restaurant supply chain there is still viewed suspiciously because of high-profile breakdowns in food safety.
Though Yum has one of the largest presences in Asia among U.S. chains, Buckley noted that other Americans have not had such an ugly time. He noted that Starbucks’ Chinese outlets have generated double-digit same-store-sales increases.
Yum CEO Greg Creed did not disagree. “There is every reason and no excuses to why we should not perform better,” he told financial analysts during a conference call Wednesday. He noted that the Chinese operations have a new CEO, Micky Pant, who is plotting a different course.
Yum has maintained that its current corporate extent makes the most sense in the long term for shareholders. It notes that it’s making progress in turning around operations in China, albeit at a slower-than-expected pace.
“The fact is we have a great collection of businesses and they have produced excellent results over the long-term,” Creed said during Wednesday’s analyst call. “As I’ve said before, the Yum board of directors regularly reviews strategic options to optimize long-term shareholder value including those involving our corporate structure.”
He declined to comment about what the board might be thinking.
Toby Keith’s off note
A failure to revive the fortunes of a bar operation affiliated with country-music star Toby Keith has triggered one of the more spectacular restaurant implosions in recent memory.
The city of Denver said it would sell everything from the local outpost of Toby Keith’s I Love this Bar, right down to the salt and pepper shakers, to collect taxes it was never paid by the concept’s operator, Phoenix-based Boomtown Entertainment. The outpost was one of 10 Boomtown-run branches that have closed since May. Seven more closed in the prior year. Three remain open, according to the chain’s website.
Elsewhere, Boomtown has been accused of taking build-out contributions from landlords and never spending the money. There are also allegations the restaurants did not pay suppliers or pass along collected sales taxes.
An investigation by the Arizona Republic revealed that Boomtown is being sued in 24 states for a total of $28.6 million.
Other than licensing his name to the operation, Keith apparently has no involvement with Toby Keith’s.