YUM! Brands (YUM) Earnings Preview

Quick service restaurant company YUM! Brands, Inc. (YUM) is slated to release its second-quarter 2010 results on Tuesday, July 13. The current Zacks Consensus Estimate for the second quarter is 54 cents per share, representing an annualized growth of 8.33%.

With respect to earnings surprises, over the trailing four quarters, YUM! has outperformed the Zacks Consensus Estimate each time. The average earnings surprise was a positive 12.60%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Previous Quarter Performance

YUM! reported better-than-expected first-quarter 2010 results, driven by strong performances in China and by YUM! Restaurants International (YRI) division.

YUM!’s quarterly earnings of 59 cents per share (excluding special charges) comfortably surpassed the Zacks Consensus Estimate of 53 cents per share, and surged 23% year-on-year from 48 cents posted in the prior-year quarter. On a reported basis, earnings climbed 9% to 50 cents per share from 46 cents delivered in the year-ago quarter.

Lower G&A expenses (down 4%) and operating profit growth in both China (up 37%) and the YRI (up 13%, and up 2% excluding foreign currency translation) divisions drove earnings. These were partially offset by a 3% increase in the company’s restaurant expenses and a 9% decline in the U.S. Division’s operating profit.

Comparable restaurant sales increased 4% in mainland China. However, comps fell 2% in the international markets and 1% in the U.S. The decline in U.S. comps consisted of a 5% increase in Pizza Hut, and declines of 2% at Taco Bell and 4% at KFC. YUM!’s total revenue improved 6% to $2,345 million, stemming from a 24% growth in the China division and 12% growth in YRI, offset by a 11% fall in the U.S. division.


Management expects to open about 475 new restaurants in China and about 900 new units in the international markets in 2010. Additionally, the company has retained its guidance of achieving at least 10% EPS growth in 2010.

Management expects fiscal 2010 same-store sales growth of about 2% at its mainland China division, 3% at its International division, and 2% at its U.S. division.

Estimates Revisions Trend

Estimates have moved up in the last 30 days, implying that the analysts do see a meaningful catalyst for the time being. The current Zacks Consensus Estimate is $2.48 for 2010, reflecting a year-over-year growth of 14.12% and $2.78 for 2011, reflecting a year-over-year growth of 12.13%.

Agreement of Estimate Revisions

In the last 30 days, out of 18 analysts covering the stock, 2 analysts increased their third quarter estimates. Additionally, 2 out of the 20 analysts covering the stock raised their estimates for full fiscal 2010. None of the analysts made a downward revision to their forecasts. However, for fiscal 2011, 2 out of the 19 analysts covering the stock raised their estimates and 2 reduced their estimates, thus providing no directional movement.

Magnitude of Estimate Revisions

There has been no change in the last 60 days in the earnings estimate of 54 cents for the second quarter as seen from the magnitude of the Consensus estimate trend. Therefore, the analysts expect the company to report in line.

Following the first-quarter earnings release, earnings estimates for 2010 improved to $2.47 from the previous estimate of $2.40. The analysts have based the upward revision on company’s growth potential outside the U.S., particularly China, and YUM! should post sequentially improving results for the remainder of the year. Additionally, during the past 30 days the earnings estimate increased to $2.48 per share, to reflect an improved margin outlook in the U.S.

Earnings estimate for 2011 improved to $2.78 from a loss of $2.69 prior to the earnings announcement, driven by expectations of strong international growth and improvement at Taco Bell. However, in the past 30 days earnings estimate was reduced to $2.77, but now earnings is expected at $2.78 per share.

Maintain Neutral Rating

We believe YUM! remains on track to achieve its annual EPS growth target of at least 10% through unit development, comparable-store sales growth, restaurant operating margin expansion, and share repurchases. We believe that the company’s overseas expansion remains one of the key growth drivers. The company’s well diversified growth model includes an annual operating profit growth of 15% and 10% in China and its International division, respectively.

YUM!’s major competitors include McDonald’s Corporation (MCED) and Darden Restaurants Inc. (DRI).

We have a Neutral rating on YUM! as its Chinese division offers immense growth potential with its two leading brands KFC and Pizza Hut and it is adopting a refranchising strategy which will reduce its capital requirement and increase its free cash flow to enhance shareholders return. However, stiff competition from other quick-service restaurant operators, currency fluctuation and macro-economic factors influencing consumer spending patterns still remain concerns.

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