Yum! Brands Inc.
) second-quarter 2013 adjusted earnings of 56 cents per share
beat the Zacks Consensus Estimate by 1.8%, but slipped 16.4% year
over year. On a reported basis, Yum! Brands' quarterly earnings
of 61 cents per share were down 13% year over year.
In the second quarter, total revenue declined 8% year over
year to $2.9 billion and also fell short of the Zacks Consensus
Estimate of $3.0 billion by nearly 3.3%. Yum!'s weak China
division has been held responsible for such poor results during
The outbreak of avian flu in China in early-Apr 2013 marred
the division's quarterly results. To add to the woes, an adverse
publicity arising from the KFC China's poultry supply situation
in Dec 2012 continues to negatively impact on the China
division's performance. China, which used to be a major
contributor to Yum!'s growth in the past few years, began to post
dismal results since late 2012 due to these setbacks.
Behind the Headline Numbers
Geographically, Yum!'s business includes four reporting
segments: United States, the China Division, consisting only of
mainland China, Yum Restaurants International (YRI) and
China division's comps have suffered a 20% decline in the
second quarter as against a 10% growth in the year-ago quarter.
Quarterly decline in comps was the result of a 26% fall in KFC
comps owing to the negative publicity, partially offset by a 7%
increase in comps at Pizza Hut Casual Dining.
Comps at the India division increased 2%. Comps also nudged up
1% in the YRI division.
The U.S. division witnessed comps growth of 1% on the back of
2% and 3% rise in comps at Taco Bell and KFC, respectively.
However, comps at Pizza Hut were down 2%. Management expects Taco
Bell to grow further in the U.S. with the ongoing investment in
technology and equipment.
In the quarter under review, Yum! Brands witnessed a decline
in its overall cost structure. Company-restaurant expenses
decreased 7.5% year over year as a result of significantly lower
expenses in the company's U.S. and YRI division.
Company-restaurant expenses were significantly higher in the
Worldwide operating profit witnessed a fall of 20%, excluding
foreign currency translation, mainly due to a 63% decrease in
China division's profit, partially offset by 12% and 4% profit
growth at YRI and the U.S., respectively. While foreign currency
translation helped China's profit to grow by $1 million, the same
has pulled back the YRI's profit by $5 million.
Restaurant margin fell 270 basis points (bps) to 12.5% as a
result of a 500 bps decline in China's restaurant margin. China
division's margin was mostly affected by the company's lower
sales in the region. However, both the YRI and the U.S.
compensated the decline with a margin gain of 80 bps, driven by
its refranchising initiatives.
Year to date, the company has bought back 5.7 million shares
worth $390.0 million.
The company retains its earnings outlook for 2013. Yum!
expects its 2013 earnings per share to decline in mid-single
digit owing to lower sales. With new sales-driven initiatives,
management expects its business to pick up speed from 2014
Although the company's China division is under pressure, it
will gradually recover from the downturn and might post
impressive results in late 2013 and 2014. The company plans to
unveil 700 restaurants in China in 2013.
The company also remains positive on the growth prospects of
its YRI and India divisions as it has a solid development
pipeline in the emerging markets including India in 2013.
Although Yum! Brands' second-quarter 2013 earnings per share
and revenues fell sharply due to the lackluster performance of
the China division, management expects these hurdles to be
short-term and also anticipates a strong performance in the
latter half of the year. However, we believe that there is an
uncertainty regarding the proper pace of recovery.
On a brighter side, Yum!'s India and YRI segments are
expected to perform well, going ahead. The U.S. segment is also
rebounding with higher profits and comps growth in Taco Bell and
Some other restaurateurs which look attractive at the current
Krispy Kreme Doughnuts, Inc.
BJ's Restaurants, Inc.
AFC Enterprises Inc.
). While Krispy Kreme carries a Zacks Rank #1 (Strong Buy), BJ's
Restaurants and AFC Enterprises both carry a Zacks Rank #2
AFC ENTERPRISES (AFCE): Free Stock Analysis
BJ'S RESTAURANT (BJRI): Free Stock Analysis
KRISPY KREME (KKD): Free Stock Analysis
YUM! BRANDS INC (YUM): Free Stock Analysis
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