Yum! Beats as China Outperforms

Yum! Brands Inc. (YUM - Analyst Report) reported fourth quarter 2011 adjusted earnings of 75 cents per share, which beat the Zacks Consensus Estimate by a penny. Earnings increased 20% year over year, mainly on the back of outperformance at its China division and other emerging markets as well as the fifty third business week in the U.S. and YRI divisions. On a reported basis also, Yum! Brands’ quarterly earnings were 75 cents per share, up 33% year over year.

In full-fiscal 2011, Yum! Brands’ adjusted earnings were $2.87 per share, up 14% year over year. On a reported basis, earnings per share grew 15% to $2.74.                                  

The company reported a 15% year-over-year increase in total revenue to $4,111 million, which surpassed the Zacks Consensus Estimate of $4,040 million. System Sales growth was a respective 33%, 10% and 6% in China, Yum! Restaurants International (YRI) division (excluding foreign currency translation) and the U.S division. In full-fiscal 2011, total revenue increased 11% year over year to $12,626 million.

Behind the Headline Numbers

Comparable-restaurant sales (comps) improved 21% in mainland China. YRI division witnessed a 3% rise in comps. Comps nudged up 1% in the U.S., with 6% rise at Pizza Hut partially offset by a respective 2% and 1% decline at Taco Bell and KFC.

In the quarter under review, Yum! Brands saw a spike in its overall cost structure. Company-restaurant costs and general and administrative (G&A) expenses increased 17% and 8%, respectively. China and the YRI division were unable to reduce their cost structures. However, their increases were partially made up by a respective 6% and 12% cut in company-restaurant costs and G&A expenses at the U.S. division.

Consolidated operating profit upped 15% year over year. All three geographic segments, China (up 21%; and up 15% excluding foreign currency translation), YRI (up 13%; and up 12% excluding foreign currency translation) and the U.S. (up 10%) contributed to the growth. Operating profits at China and YRI divisions saw positive foreign currency influences of $11 million and $2 million, respectively.

As expected, restaurant margin slipped 2.4 percentage points in China due to wage and commodity inflation. Restaurant margin slid 0.6 percentage points in YRI division and 0.7 percentage points at the U.S. segment.

Unit Growth

Robust performance in the China division during the quarter was primarily driven by 327 new openings. Further, Yum! Brands solidified its footprint internationally by opening 452 new units in the quarter under review.

Financials

At quarter end, Yum! Brands had cash and cash equivalents of $1,198.0 million with long-term debt of $2,997 million, and shareholder equity of $1,916 million.

Outlook

The company expects full year 2012 EPS growth of at least 10%.

Our Take

We still see China as playing the major role in Yum! Brands’ growth story. The company remains bullish on emerging markets which contributed nearly 50% of operating profit at the YRI division. The company has also been trying various sales layers like breakfast and expanded beverages.

However, commodity inflation could continue to play foul worldwide. Stiff competition from other quick-service restaurant operators also remained an overhang. Yum! Brands, which competes with McDonald’s Corp. (MCD - Analyst Report), currently retains a Zacks #2 Rank (short-term Buy recommendation). We reiterate our long-term Neutral rating.

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