Missteps in China have hammered
Yum! Brands, Inc.
) earnings growth in 2013. Will this Zacks Rank #5 (Strong Sell)
turn it around in 2014?
Yum Brands is the world's largest restaurant chain operating three
famous brands: KFC, Pizza Hut and Taco Bell. It is also the largest
restaurant chain in the lucrative Chinese market.
Third Quarter EPS Miss
On Oct 8, Yum reported third quarter results which missed on the
Zacks Consensus Estimate by $0.08. Earnings were $0.85 compared to
the consensus of $0.93.
The big miss was a surprise because Yum's problems in China, which
had been ongoing since a December 2012 television expose led to
adverse publicity about its poultry supply, were well known. The
company has been updating the China sales monthly.
However, Chinese sales, which Yum kept insisting would rebound back
into the positive by the fourth quarter, did not recover quickly
In the third quarter, China same store sales fell 11%. Yum provided
a September same-store-sales update, which is part of Q4, and those
were estimated to have declined 11% as well with KFC falling 13%
while Pizza Hut gained 6%. KFC is the larger chain in China,
In early Oct, Yum admitted that the China Division same-store sales
were now "unlikely" to be positive for the fourth quarter.
A lot of focus has been on the problems in China, which the company
also has blamed on spring's Avian flu break-out.
But same-store sales were flat in the U.S. in the third quarter as
well. Even internationally, excluding China, same-store sales grew
just 1% in the third quarter.
Given the lack of a recovery in the China Division, Yum lowered its
full year earnings outlook.
The analysts also moved to lower both 2013 and 2014 estimates.
Earnings are now expected to decline 10.5% in 2013 from 2012 to
$2.92 per share.
While analysts see a turnaround in 2014, as China gets sorted out,
15 estimates have been revised lower since the earnings report. The
2014 Zacks Consensus Estimate has fallen to $3.63 from $3.79 just a
Shares of Yum fell after the earnings report but still trade with a
forward P/E of 23 which is higher than the average of the S&P
500 of 16.1.
The Zacks Rank is a short term recommendation of 1 to 3 months. Yum
said it expects to grow earnings by at least 20% in 2014. The
analysts currently forecast 24% earnings growth.
Investors should be watching the monthly China Division sales
updates. The October sales are expected to be released on Nov 12
after the market closes.
As an alternative, check out
Chipotle Mexican Grill
). It is expected to grow earnings 21% both this year and in 2014.
It has only just begun its international expansion. Chipotle is a
Zacks Rank #2 (Buy).
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