Earnings Preview: Yum! Brands

Quick service restaurant company, Yum! Brands Inc. (YUM) is slated to release its second quarter 2011 results on July 13, after the closing bell. The current Zacks Consensus Estimate for second quarter earnings is 61 cents per share on revenue of $2,694.0 million.

Yum! Brands has outperformed the Zacks Consensus Estimate three times over the trailing four quarters, with earnings surprises varying in the range of a negative 1.56% to 7.41%. The average earnings surprise was 3.06%. This implies that the company has beaten the Zacks Consensus Estimate by this magnitude over the last four quarters.

Previous Quarter Performance

Kentucky-based Yum! Brands reported first quarter 2011 adjusted earnings of 63 cents per share, which fell short of the Zacks Consensus Estimate by a penny. Earnings increased 7% year over year mainly on the back of strong performance at its China division. On a reported basis, Yum! Brands’ quarterly earnings were 54 cents per share, up 10% year over year.

The company reported a 3% year-over-year increase in total revenue to $2,425 million, which surpassed the Zacks Consensus Estimate of $2,379 million. Sales growth was fueled by a 28% increase in the China division, partly offset by 9% and 5% declines in the U.S. and Yum! Restaurants International (YRI) division, respectively.

Estimates Revisions Trend

Estimates for the to-be reported quarter remained unchanged in the last 60 days, implying that the analysts are maintaining their outlook on the stock.

Agreement of Estimate Revisions

In the last 7 days, one out of 18 analysts covering the stock reduced the second quarter estimate while none went for any increment. The movement was same for fiscal 2011 with one analyst cutting the same.

Magnitude of Estimate Revisions

Over the past 60 days, Yum! Brands’ estimates for the second quarter did not change. Therefore, the analysts expect the company to report in line. However, the estimate for fiscal 2011 was reduced by a penny in the last 7 days. Currently, the Zacks Consensus Estimates for 2011 is $2.83 per share.

Our Take

We believe, Yum! Brands’ performance in the U.S. will depend on the extent to which Taco Bell rebounds. Taco Bell, which accounts for more than 60% of the total U.S. earnings, is presently the most important domestic brand. But negative publicity due to the lawsuit related to the content and quality of its beef products took a toll on its results last quarter.

Another area of observation will be the performance in China, Yum! Brands’ major growth market. Although two leading brands of the company –– KFC and Pizza Hut –– offers significant prospects, it will be under competitive pressure from McDonald’s Corp. (MCD).

Moreover, issues like tough comparisons in China, cost escalation and wage inflation might mute Yum!’s margins in the upcoming quarter.Yum! Brands also expects profits from Japan to be down somewhat due to the impact of the earthquake and tsunami. Yum! Brands currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

YUM! BRANDS INC (YUM): Free Stock Analysis Report

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