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Earnings Preview: Yum! Brands

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Yum! Brands Inc. (YUM - Analyst Report) the parent company of Pizza Hut, KFC and Taco Bell, is slated to release its third quarter 2012 results on October 9, after the closing bell. The current Zacks Consensus Estimate for the third quarter is at 97 cents per share on revenue of $3,634.0 million.

Earnings Surprise

Yum! Brands outperformed the Zacks Consensus Estimate three times over the trailing four quarters, with earnings surprises varying in the range of negative 4.29% to positive 1.22%. The average earnings surprise was 0.60%. 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 second quarter 2012 adjusted earnings of 67 cents per share which fell short of the Zacks Consensus Estimate of 70 cents. Earnings nudged up just 1% year over year. On a reported basis, Yum! Brands’ quarterly earnings were 69 cents per share, up 6% year over year.

The company reported a 12% year-over-year increase in total revenue to $3,168 million. Sales growth was fueled by a 27% increase in the China division as well as 7% and 1% upside in the U.S. and Yum! Restaurants International (YRI) division, respectively.

Comparable-restaurant sales (comps) improved 10% in mainland China, 4% in YRI and 7% in the U.S. division. In the quarter under review, Yum! Brands witnessed a spike in its overall cost structure. However, consolidated operating profit grew 8% year over year, considering foreign-currency translation.

Outlook

The company reiterated its full-year 2012 earnings per share growth expectation of at least 12.0%.

Zacks Consensus

The analysts covered by Zacks expect Yum! Brands to post earnings of 97 cents per share for the third quarter of fiscal 2012, higher than the prior-year earnings of 83 cents. Currently, the Zacks Consensus Estimate ranges between 94 cents and $1.05 a share.

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. Of the analysts covering the stock, 70% were positive while 30% adopted a neutral stance on the stock.

Agreement of Estimate Revisions

In the last 7 days, one out of 18 analysts covering the stock increased the second quarter estimate while none decreased it. For 2012, out of 20 analysts, one has moved the estimate up, while one has moved down, implying no clear directional pressure. For 2013, two analysts have lowered the estimate while none moved in the opposite direction.

Magnitude of Estimate Revisions

Over the past 60 days, Yum! Brands’ estimates for the third quarter did not change. Therefore, the analysts expect the company to report in line. For the same period, the estimates for 2012 also remained unchanged at $3.26. However, the estimate for fiscal 2013 was reduced by a penny in the last 7 days. Currently, the Zacks Consensus Estimates for 2013 is $3.71 per share.

Our Take

We believe, Yum! Brands’ performance in the U.S. will depend on Taco Bell’s momentum. Taco Bell, which accounts for more than 60% of the total U.S. earnings, registered a solid 13% gain in comps in the second quarter of 2012 after a 6% increase in the first quarter. The huge success of the Doritos Locos Tacos’ launch paved the way for Taco Bell in the U.S. The company takes a more optimistic stance for Taco Bell backed by the July launch of Cantina Bell, which was a Fast Casual type offering at discounted prices.

Another area of observation will be the performance in China, Yum! Brands’ major growth market, as well as cost pressure and its impact on margins.  Despite delivering depressed margins in second-quarter 2012, Yum! expects modest margin improvement in the latter half of 2012 and double-digit profit growth mainly backed by strong top-line growth.

Moreover, this quick service restaurant company remains on track to achieve its annual earnings per share growth target through unit development, comparable-store sales growth, revitalization of the core brand of the U.S. Taco Bell and share repurchases as well as dividend payments.

However, stiff competition from other quick-service restaurant operators like Brinker International, Inc. (EAT - Analyst Report), increased tax rate for full-fiscal 2012, concerns over European economies, slowdown in China, wage inflation and margin pressure pose as near term offsets.

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.

 

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