YUM! Brands Inc (
) reported disappointing Q3 results and September comps for China
below expectations after the close on Tuesday, 10/8.
Specifically, the company reported earnings of $0.85 (excluding
a $0.55 non-cash charge for the write-down of Little Sheep
intangible assets), which fell short of analyst estimates by
The delta versus the street came from a miss on the top line as
a result of slower growth at KFC China coupled with a higher tax
rate of 33.1% due to a reserve adjustment.
Restaurant margins of 17.6% and shares outstanding were a net
neutral to the bottom line.
KFC China -- The Culprit For Lowered Guidance
Critically, what is most concerning is that the street was
already cautious on China given expectations for Q3 and September
comp declines (and already baked into earnings models).
As a background, on December 20, 2012, the Shanghai Food and
Drug Administration found eight batches of chicken supplied to Yum!
by Liuhe Group Co. that had antibiotics levels which didn't meet
However, the 13% decline at KFC for September still managed to
miss the low bar, as sales in China have not recovered from the
adverse publicity (side bar 1 -- this was 9 months ago already,
which is not a good sign).
Moreover, owing to easing compares in October, investors
expected a return to positive comps in China for Q4. Instead,
management guided that "based on KFC China sales for September, it
is now unlikely China Division same-store sales will be positive
for the fourth quarter."
This, coupled with a higher tax rate forecast for FY13, caused
YUM to lower its FY13 guidance to a high single to low double digit
decline in earnings (in comparison to the company's prior outlook
for a mid single digit fall).
The Street's Actions - Post YUM Q3 Release
As the earnings call is not until today at 9:15AM ET, analysts
will likely spend the overnight tweaking their models (side bar 2
-- the associates will likely lower estimates for FY13 and FY14 as
well as target prices). Currently, the mean price for YUM is $78
with 5 Strong Buys, 5 Buys, and 14 Holds on the sell side.
Notably, it was already a challenge modeling the margin impact
from the ongoing negative comp in China, but now the trajectory
into positive territory is going to be even further pushed out.
While YUM did guide to 20% earnings growth for 2014, this seems
aggressive in light of recent developments (side bar 3 -- the
street is unlikely to bite on this forecast).
Moreover, investors were hoping for some positive momentum from
comps in the US and YRI (Yum! Restaurants International). Both of
these segments had been performing better but their performance in
Q3 was not enough to offset the 11% decline in China during the
quarter. Comps in the US and YRI came in flattish and up 1%,
MT Newswires Calculation: Downside to $60
Bottom line, as a result of management's revised guidance for
FY13, MT Newswires is assuming a 10% earnings decline (versus
current consensus of a 5-7% decline) for the year. On a base of
$3.37 for FY12, this would equate to $3.03 for FY13 (below the
street at $3.06, per Thomson Reuters).
Similarly, utilizing a more conservative estimate of 15% growth
for FY14 would imply $3.50 in earnings, which compares to the
street at $3.80 (and a $0.30 delta).
Using the weighted average of these two growth rates would get
to an overall growth rate of 9% (-10% *0.25 + 15% * 0.75) for the
next twelve months. This is more comparable to rates at lower
growth companies such as McDonalds (
), at least in the near term.
YUM's peers include Papa John's (
) which is trading at 23x FY1 P/E, Texas Roadhouse (
) at 22x, Dominos Pizza (
) at 28x, Darden Restaurants (DRI) 15x and McDonald's at 17x,
On valuation, Yum! Brands' shares are trading at roughly 20x
earnings, above its 5-year median of 17x. Using this multiple
(which is also more in line with MCD) for FY14 would equate to a
$60 target price, or 20% downside from the company's last close
price of $71.67.
As a recap, Yum Brands (
) reported Q3 EPS of $0.85, below the analyst consensus of $0.93
per share on Capital IQ. Revenue was $3.46 billion, vs.
expectations of $3.53 billion.
Looking forward, the company said that based on KFC China sales
for September, it is now unlikely China Division same-store sales
will be positive for the fourth quarter.
YUM 66.60 -5.07-7.07
PZZA 68.83 0.00 0.00
DPZ 69.60 +2.17 +3.22
DRI 46.15 -0.13 -0.28
MCD 93.40 -0.54 -0.57
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