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Refranchising Strategy to Aid YUM! Brands (YUM) Q2 Earnings

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YUM! Brands, Inc. (YUM - Free Report) is scheduled to report second-quarter 2018 numbers on Aug 2, before the opening bell.

The de-risking strategy of the company to reduce the ownership of restaurants by expanding franchiseis expected to have negatively impacted revenues. But, at the same time, it is expected to have positively contributed to earnings growth.

Over the past year, shares of Yum! Brands have been almost in line with the industry’s collective growth of 4.6%.

Let’s delve deeper to find out how the company’s top and bottom lines will shape up this earnings season.

Near-Term Revenues at Risk

Yum! Brands’ revenues in the second quarter might have continued to be hurt by the refranchising initiative. In the first quarter, total revenues declined 3% year over year, mainly due to the decrease in company sales, which resulted from a continued refranchising initiative as the reduction in ownership through refranchising is expected to weigh on near-term revenues. In first-quarter 2018, the company had franchise ownership of 97% and is committed to becoming at least 98% franchised. It is also aiming to possess less than 1,000 company-owned restaurants by the end of 2018. In the first quarter, it refranchised 144 units, including 52 KFC, 43 Pizza Hut and 49 Taco Bell restaurants.

We believe the downside trend in revenues to have continued in the second quarter as well. Consequently, the Zacks Consensus Estimate for the quarter’s revenues is pegged at $1.4 billion, with a projection of a 5.5% decline from the year-ago quarter.

In addition, the company remains highly exposed to various emerging nations in Latin America. These nations have been exhibiting decelerating growth for some time, due to various macro headwinds, which may dent sales in the future.

Refranchising Strategy Safeguards Earnings

Despite having weighed on near-term revenues, Yum! Brands’ refranchising initiatives are expected to reduce the company’s capital requirements and facilitate earnings per share growth. In the meantime, free cash flow is likely to continue growing, thus, facilitating reinvestments to increase brand recognition and shareholder return. Remarkably, this shift to refranchising has been substantially benefiting the company’s operating margin over the years.

In the first quarter of 2018, earnings were 90 cents per share, growing 38% from the year-ago level. We expect second-quarter earnings to have benefitted from refranchising activities. The consensus estimate pegs second-quarter earnings at 74 cents, mirroring an 8.8% increase from the year-ago quarter.

Our Quantitative Model Predicts a Beat

Yum! Brands has the right combination of two main ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Earnings ESP: The company has an Earnings ESP of +0.64%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: The restaurant has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Yum! Brands, Inc. Price and EPS Surprise


Other Stocks to Consider

Here are some other companies in the restaurant space, which, per our model, have the right combination of elements to deliver an earnings beat this quarter.

Restaurant Brands (QSR - Free Report) currently carries a Zacks Rank #3 and has an Earnings ESP of +1.17%. It is scheduled to release second-quarter results on Aug 1, before the market opens.

With a Zacks Rank #2 (Buy), Wendy’s (WEN - Free Report) has an Earnings ESP of +1.59%. The company is slated to report its quarterly results on Aug 7, after the market closes.

Brinker (EAT - Free Report) has an Earnings ESP of +1.47% and it currently has a Zacks Rank #3. The company is expected to report quarterly results on Aug 9.

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