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YUM! Brands (YUM) Q3 Earnings to Gain From Refranchising

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YUM! Brands, Inc. (YUM - Free Report) is scheduled to report third-quarter 2018 numbers on Oct 31, before the opening bell.

Yum! Brands has a three-year transformation plan to drive growth at KFC, Pizza Hut and Taco Bell brands. The first quarter of 2018 marked Yum! Brands’ completion of the second year of its transformation journey. By relying extensively on the four key drivers of growth — distinctive, relevant and easy brands; unmatched franchise operating capability; bold restaurant developments; and unrivaled culture and talent — the company remains on track to achieve its target.

The de-risking strategy of Yum! Brands to reduce the ownership of restaurants by expanding franchise is expected to have negatively impacted revenues in the third quarter. But, at the same time, it is expected to have positively contributed to earnings growth.

Notably, over the past year,shares of Yum! Brands have gained 14.4%, outperforming the industry’s rally of 6.2%.

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

Top Line Susceptible to Risk

Yum! Brands’ revenues in the third quarter might have continued to be hurt by the refranchising initiative. In the second quarter, total revenues declined 6% 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.

We believe the downside trend in revenues to have continued in the third quarter as well. Consequently, the Zacks Consensus Estimate for the to-be-reported quarter’s revenues is pegged at $1.4 billion, with a projection of a 4% decline from the year-ago quarter.

Bottom Line to Gain From Refranchising

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 years.

In the second quarter of 2018, earnings were 82 cents per share, growing 20% from the year-ago level. We expect third-quarter earnings to have benefitted from refranchising activities. The consensus estimate pegs third-quarter earnings at 83 cents, mirroring a 22.1% increase from the year-ago quarter.

Our Quantitative Model Doesn’t Predict a Beat

Yum! Brands does not have 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 -0.73%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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

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


Stocks to Consider

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

Starbucks (SBUX - Free Report) has an Earnings ESP of +1.04% and a Zacks Rank #3. The company is scheduled to report quarterly numbers on Nov 1.

Wendy’s Company (WEN - Free Report) is slated to report quarterly results on Nov 6. The company carries a Zacks Rank #2 (Buy)and has an Earnings ESP of +0.84%.

Jack in the Box (JACK - Free Report) has an Earnings ESP of +3.18% and a Zacks Rank #3. The company is expected to report quarterly numbers on Dec5.

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