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Yum! Brands (YUM) Up on Q2 Earnings Beat, Raised Outlook
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Shares of Yum! Brands Inc. (YUM - Free Report) rallied nearly 5% in afterhours trading on Jul 13, after the quick-service restaurant operator reported better-than-expected second quarter earnings results and upped its profit outlook – for the second time this year.
Adjusted earnings per share of 75 cents beat the Zacks Consensus Estimate of 74 cents by approximately 1.4%. Further, earnings surged 8.7% year over year owing to higher margins. Adjusted earnings per share exclude certain charges associated with the agreement reached in 2015 with KFC U.S. franchisees and costs associated with the planned spin-off of the China operations.
Meanwhile, total revenue of $3.01 billion declined 3.1% year over year and also missed the Zacks Consensus Estimate of $3.1 billion by 2.9% mostly due to soft comps reported in most of the segments.
Comps Discussion
Yum! Brands currently reports under four segments — China, KFC, Pizza Hut and Taco Bell. From Jan 2016, the company’s India business integrated its three restaurant brands into the global KFC, Pizza Hut and Taco Bell divisions. Meanwhile, the company is on track to spin off the China business into an independent, publicly-traded company by Oct 31, 2016.
China division’s comps were flat in the quarter, better than the decline of 10% posted in the year-ago quarter. However, it compared unfavorably with the 6% growth witnessed in the last quarter.
Notably, a 3% surge at KFC was offset by an 11% plunge at Pizza Hut Casual Dining. Notably, results at KFC China were better than expected and marked the fourth consecutive quarter of comps growth despite the second quarter being most difficult for the company from a historical sales overlap perspective.
Management stated that the China division is off to a good start in the third quarter for both KFC and Pizza Hut, including a return of positive comps growth at the Pizza Hut division in recent weeks.
Comps at the KFC division were up 2%, same as the year-ago quarter growth and compared favorably with prior-quarter growth of 1%. Growth was witnessed across U.S. markets, developed markets and emerging markets.
Pizza Hut posted flat comps, same as the year-ago quarter but compared unfavorably with last quarter’s 3% increase. Comps grew 1% in U.S. markets and declined 1% each in developed and emerging markets.
Taco Bell comps declined 1% year over year. Sluggish comps reflect intense competition in the domestic market, especially in the breakfast segment. The figure compared unfavorably with the prior-quarter growth level of 1% and the year-ago improvement of 6%.
Restaurant margins improved at China, was flat at KFC and declined at the Taco Bell and Pizza Hut divisions.
2016 Guidance
Management expects operating profit growth (in constant currency) of at least 14% in 2016, up from the prior guidance of 12%. Notably, this is the second time the company has raised its operating profit growth forecast. In first-quarter 2016, the company had raised the same from 10% to 12%. Notably, management lifted its outlook mainly encouraged by its strong first-half results and the current profitability trends in China.
Our Take
The China division posted flat comps after recording positive comps over the last three quarters, suggesting that a complete recovery will take more time. The economic growth rate of the country has moderated lately, making consumers cautious about their discretionary spending. Further, increasing preference for healthy and nutritious food among U.S. consumers, along with intense competition, is denting the company’s domestic sales.
However, the company’s efforts to capitalize on high-growth emerging markets like Russia, Latin America, Asia, Middle East and Africa for future growth could partially mitigate these headwinds.
Zacks Rank & Stocks to Consider
Yum! Brands has a Zacks Rank #3 (Hold). Better-ranked restaurant stocks are Carrols Restaurant Group, Inc. (TAST - Free Report) , Famous Dave's of America Inc. (DAVE - Free Report) and Dave & Buster's Entertainment, Inc. (PLAY - Free Report) . All the three stocks sport a Zacks Rank #1 (Strong Buy).
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Yum! Brands (YUM) Up on Q2 Earnings Beat, Raised Outlook
Shares of Yum! Brands Inc. (YUM - Free Report) rallied nearly 5% in afterhours trading on Jul 13, after the quick-service restaurant operator reported better-than-expected second quarter earnings results and upped its profit outlook – for the second time this year.
Adjusted earnings per share of 75 cents beat the Zacks Consensus Estimate of 74 cents by approximately 1.4%. Further, earnings surged 8.7% year over year owing to higher margins. Adjusted earnings per share exclude certain charges associated with the agreement reached in 2015 with KFC U.S. franchisees and costs associated with the planned spin-off of the China operations.
Meanwhile, total revenue of $3.01 billion declined 3.1% year over year and also missed the Zacks Consensus Estimate of $3.1 billion by 2.9% mostly due to soft comps reported in most of the segments.
Comps Discussion
Yum! Brands currently reports under four segments — China, KFC, Pizza Hut and Taco Bell. From Jan 2016, the company’s India business integrated its three restaurant brands into the global KFC, Pizza Hut and Taco Bell divisions. Meanwhile, the company is on track to spin off the China business into an independent, publicly-traded company by Oct 31, 2016.
YUM! BRANDS INC Price, Consensus and EPS Surprise
YUM! BRANDS INC Price, Consensus and EPS Surprise | YUM! BRANDS INC Quote
China division’s comps were flat in the quarter, better than the decline of 10% posted in the year-ago quarter. However, it compared unfavorably with the 6% growth witnessed in the last quarter.
Notably, a 3% surge at KFC was offset by an 11% plunge at Pizza Hut Casual Dining. Notably, results at KFC China were better than expected and marked the fourth consecutive quarter of comps growth despite the second quarter being most difficult for the company from a historical sales overlap perspective.
Management stated that the China division is off to a good start in the third quarter for both KFC and Pizza Hut, including a return of positive comps growth at the Pizza Hut division in recent weeks.
Comps at the KFC division were up 2%, same as the year-ago quarter growth and compared favorably with prior-quarter growth of 1%. Growth was witnessed across U.S. markets, developed markets and emerging markets.
Pizza Hut posted flat comps, same as the year-ago quarter but compared unfavorably with last quarter’s 3% increase. Comps grew 1% in U.S. markets and declined 1% each in developed and emerging markets.
Taco Bell comps declined 1% year over year. Sluggish comps reflect intense competition in the domestic market, especially in the breakfast segment. The figure compared unfavorably with the prior-quarter growth level of 1% and the year-ago improvement of 6%.
Restaurant margins improved at China, was flat at KFC and declined at the Taco Bell and Pizza Hut divisions.
2016 Guidance
Management expects operating profit growth (in constant currency) of at least 14% in 2016, up from the prior guidance of 12%. Notably, this is the second time the company has raised its operating profit growth forecast. In first-quarter 2016, the company had raised the same from 10% to 12%. Notably, management lifted its outlook mainly encouraged by its strong first-half results and the current profitability trends in China.
Our Take
The China division posted flat comps after recording positive comps over the last three quarters, suggesting that a complete recovery will take more time. The economic growth rate of the country has moderated lately, making consumers cautious about their discretionary spending. Further, increasing preference for healthy and nutritious food among U.S. consumers, along with intense competition, is denting the company’s domestic sales.
However, the company’s efforts to capitalize on high-growth emerging markets like Russia, Latin America, Asia, Middle East and Africa for future growth could partially mitigate these headwinds.
Zacks Rank & Stocks to Consider
Yum! Brands has a Zacks Rank #3 (Hold). Better-ranked restaurant stocks are Carrols Restaurant Group, Inc. (TAST - Free Report) , Famous Dave's of America Inc. (DAVE - Free Report) and Dave & Buster's Entertainment, Inc. (PLAY - Free Report) . All the three stocks sport a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>