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Yum! Outperforms, China Sales Weak

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Yum! Brands Inc. (YUM - Free Report) reported fourth quarter 2012 adjusted earnings of 83 cents per share, ahead of the Zacks Consensus Estimate by 2 cents. Earnings surged 10% year over year on the back of outperformance at its YUM! RESTAURANTS INTERNATIONAL (YRI), U.S. and INDIA division. However, negative publicity arising from the recent allegation against Yum!’s KFC in China regarding the quality of chicken supplied to KFC has adversely impacted its performance during the quarter.

On a reported basis, Yum! Brands’ quarterly earnings were 72 cents per share, down 3% year over year. In full year 2012, Yum! Brands’ adjusted earnings were $3.25 per share, up 13% year over year. On a reported basis, earnings per share grew 23% to $3.38.

In fourth quarter, the company reported a 1% year-over-year increase in total revenue to $4,153.0 million, which surpassed the Zacks Consensus Estimate of $4,127 million. In 2012, total revenue increased 8% year over year to $13,633 million, in line with the Zacks Consensus Estimate.  The company has gained in terms of sales from an additional business week in December 2012.

Behind the Headline Numbers

Excluding foreign currency translation, global system sales remained consistent in fourth quarter whereas it has increased 5% in 2012. Yum!’s India Division witnessed a considerable growth of 24% in system sales (foreign currency translation excluded) with 27% unit growth and 5%  same-store sales growth.

In fourth quarter, Comparable-restaurant sales (comps) plunged 6% in China with an 8% decline in same-store sales for KFC owing to the negative publicity. YRI division witnessed a 3% rise in comps. Comps nudged up 3% in the U.S., with 5% and 4% rise at Taco Bell and KFC, respectively, offsetting a 1% fall at Taco Bell.

In the quarter under review, Yum! Brands witnessed a dip in its overall cost structure. Company-restaurant costs and general and administrative (G&A) expenses fell 1% and 12%, respectively. Although, China and the YRI division were able to reduce their G&A costs, it was up by 2% at the U.S. division.

Operating profit expanded 6% year over year, excluding foreign-currency translation. One of the company’s major geographic segments, YRI’s profit was up 8% annually; and 10% excluding foreign currency translation. The profit for China and the U.S. were down by 3% and 5% annually, respectively.

While foreign currency translation helped China’s operating profit by $3 million, it bore an adverse impact of $5 million at YRI. Operating profit at the U.S. division was adversely affected by 12% due to the divestiture of Long John Silver's and A&W brands.

In fourth quarter, restaurant margin inched up 0.1% to 14.4% as margin including foreign currency rose 2.2% to 14.1% in the YRI division and climbed up 3.3% to 16.7% at the U.S. segment, backed by solid sales growth. However, China Division has experienced  a 1.9% fall in its restaurant margin.

Unit Growth

The company has introduced 1,976 new units in 2012. It includes 889 new openings in China, 138 in India and 949 new restaurants opening at YRI. Of the total unit opening, 617 restaurants were launched in the emerging markets.


At quarter end, Yum! Brands had cash and cash equivalents of $776.0 million with outstanding long-term debt of $2,932 million, and shareholder equity of $2,253.0 million.

Share Repurchase & Dividend Hike

During the year, the company repurchased 14.9 million shares worth $985 million at an average price of $66. The company has also raised its dividend to $1.34 per share in 2012.


In the U.S. and YRI segment, YUM remains optimistic about further improvement in operating profit. As the company’s KFC brand is currently under high pressure in China due to the adverse media attention, Yum expects its comps in the region to fall 25% in the first two months of first quarter 2013.

However, over the year, KFC comps are likely to recover, and it should increase in fourth quarter. The company projects that in 2013, its earnings per share will fall in mid-single digit owing to low sales.

Our Take

China remains a crucial player in Yum! Brands’ growth. Hence, the current turmoil in KFC China may be detrimental to the company’s overall business going forward. Although the company is trying to overcome this adverse situation but it will take time to completely recover.

YUM! currently carries a Zacks Rank #3 (Hold). Among its peers – McDonald’s Corporation’s (MCD - Free Report) recently declared its fourth quarter 2012 earnings of $1.38 per share which beat the Zacks Consensus Estimate as well as the year-ago earnings of $1.33 per share. Its revenue was also grown 2.0% year over year to $6,952.1 million. For full year 2012, both earnings per share of $5.36 and revenues of $27.6 billion grew 2% year over year.

Another peer, AFC Enterprises Inc. recently declared its preliminary fourth quarter and full year 2012 results. The company projects its adjusted earnings per share for the full year of 2012 to be within $1.23-$1.24, up from 99 cents in 2011. AFC also provided a rosy outlook for 2013. AFC currently holds a Zacks Rank #2 (Buy).

Yet another peer Dunkin Brands Group, Inc. (DNKN - Free Report) recently posted fourth-quarter and full year 2012. It currently holds a Zacks Rank #2 (Buy).

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