Yum! Brands Inc. (YUM) posted better-than-expected, fourth-quarter 2010 results on February 2, 2011, driven by robust performance in the China division. Given below is our report on the recent earnings announcement as well as subsequent analyst estimate revisions over the short and long-term periods.
Earnings Report Flashback
Yum! Brands reported fourth quarter 2010 adjusted earnings of 63 cents per share, which surpassed the Zacks Consensus Estimate by 3 cents. Earnings increased 27% year over year mainly on the back of strong performance at its China division. On a reported basis, Yum! Brands’ quarterly earnings were 56 cents per share, up 26% year over year.
The company reported a 6% year-over-year increase in total revenue to $3,562 million during the quarter, ahead of the Zacks Consensus Estimate of $3,499 million. Sales growth was fueled by a 21% increase in the China division and 1% rise in YRI, partly offset by a 4% decline in the U.S.
Comparable-restaurant sales improved 8% in mainland China and 5% in the U.S. Growth in the U.S. was attributable to a 10% increase in Pizza Hut and a 2% rise at Taco Bell, but was offset by a 4% decline at KFC.
In the quarter under review, Yum! Brands saw a decline in its overall cost structure. Company-restaurant costs and general and administrative (G&A) expenses declined 13% and 4%, respectively. China was able to reduce every aspect of its cost structure.
However, these were partially mitigated by 4% and 7% hikes, respectively, in company-restaurant costs in YRI and U.S. divisions. On a year-over-year basis, G&A expense fell 8% in the YRI division and 12% in the U.S.
Earnings Estimate Revisions: Overview
Following the release of fourth quarter results, estimate revision trends among the analysts depict a muted outlook in the near term and a bullish outlook over the long term. Let’s dig into the earnings estimate details.
Agreement of Estimate Revisions
Over the last 7 days, 2 out of 17 analysts upped their estimates while 5 analysts cut the same. The analysts remained cautious as the severe winter in the U.S. expected in the early months of 2011 will also have an adverse impact on the first quarter 2011 revenue of Yum!
However, the analysts remained optimistic on fiscal 2011 earnings as 12 analysts out of 21 raised their estimates while none lowered the same. The positive note was also maintained for 2012 as 6 out of 18 analysts increased their estimates while 2 analysts moved downward.
The analysts have raised their estimates to reflect the leverage from unit expansion in 2010, which was back-end loaded and will have most of the impact on 2011 earnings. Yum! expects to add 1,400 new units outside the U.S. in 2011. The new units built in 2010 and 2011 should deliver about half of its earnings per share growth.
The analysts, by and large, are optimistic on a host of tailwinds Yum! will likely enjoy in 2011. Lower interest expense due to favorable debt issuance over the past couple years as well as around $20 million currency translation benefits in China and YRI will augur well for the company. Additionally, a modest price increase in China and the positive impact from Mexico refranchising will boost the company’s performance.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for Yum! brands has been moderate over the last 7 days. Following the release of fourth quarter results, the estimate for the first quarter did not budge. The estimate for fiscal 2011 has been raised by 3 cents. However, the estimate for 2012 has been cut by a penny due to the lack of visibility.
Currently, the Zacks Consensus Estimate for the first quarter is 64 cents per share. For 2011 and 2012, the Zacks Consensus Estimates are $2.84 and $3.18, respectively.
We believe that the company’s overseas expansion remains one of its key growth drivers. Moreover, Yum! brand’s recognition, consistent performance and emerging market operations are an edge over competitors.
The Chinese division of Yum! offers significant prospects with its two leading brands KFC and Pizza Hut. Yum! Brand’s close competitor McDonald’s Corp. (MCD) has accelerated its unit growth in the Chinese market, but still lags Yum!
However, stiff competition from other quick-service restaurant operators, cost escalation, wage inflation, and tough comparisons in China owing to The World Expo, will keep margins under pressure in 2011. Moreover, in China, a new business tax will have a negative impact of around $25 million in 2011. Consequently, we have a Zacks #3 Rank (short-term Hold recommendation) on the shares. We also reiterate our long-term Neutral rating.