Yum! Brands Inc.
) first-quarter 2013 adjusted earnings of 70 cents per share were
ahead of the Zacks Consensus Estimate by 12.9% but slipped 8%
year over year. On a reported basis, Yum! Brands' quarterly
earnings of 72 cents per share were down 24% year over year.
In the first quarter, total revenue slid 8% year over year to
$2.54 billion and fell shy of the Zacks Consensus Estimate of
$2.65 billion. The year-over-year decline in revenues and
earnings was due to the poor performance by the China division.
The negative publicity arising out of the allegation regarding
the quality of chicken supplied to Yum!'s KFC in China in late
Dec 2012 marred the company's quarterly results.
It seems the Chinese division of Yum!, which is also the
largest contributor to its revenue stream, is going through a bad
phase. Yum!'s KFC in China has suffered a couple of setbacks of
late due to adverse publicity and the recent outbreak of H7N9
Behind the Headline Numbers
Comparable-restaurant sales (comps) plunged 20% in China with
a 24% decline in KFC owing to the negative publicity and a 2%
decline at Pizza Hut Casual Dining. Comps at India division also
declined 3%. Comps nudged up 1% in the YRI (Yum! Restaurant
International) division. The U.S. division witnessed comps growth
of 2% on the back of 6% growth in Taco Bell, partially offset by
1% decline at both Pizza Hut and KFC.
In the quarter under review, Yum! Brands witnessed an increase
in its overall cost structure. Company-restaurant expenses rose
7%. Although, these expenses in China were slightly down, it was
significantly up in the US and YRI division.
Worldwide operating profit declined 14%, excluding foreign
currency translation, mainly due to a 41% decline in China,
partially offset by 19% and 5% profit growth at YRI and the U.S.
respectively. While foreign currency translation helped China's
operating profit by $2 million, it had a negligible impact on
Restaurant margin fell 270 basis points (bps) to 15.9% as
China witnessed a decline of 700 bps in restaurant margin.
However, YRI and the US compensated the decline with a respective
gain of 140 bps and 240 bps.
During the quarter, the company repurchased 1.7 million shares
worth $112.0 million at an average price of $65.0.
YUM remains optimistic about further improvements in the U.S.
and YRI businesses. The company's KFC brand will remain under
pressure in China due to the lingering effect of the adverse
media attention and the recent Avian Flu scare. Based on the
results through the first three weeks of April, Yum! foresees its
China Division comps to decline about 30% for the month.
Yum! expects its 2013 earnings per share to decline in
mid-single digit owing to low sales. Management expects sales to
pick up speed from 2014 onward.
China plays a crucial role in Yum! Brands' growth story.
Hence, the current turmoil in KFC China may be detrimental to the
company's overall business in the near term. Although the company
is trying to overcome this adversity through an aggressive
quality assurance marketing campaign and various promotional
offers, it will take time to recover fully. Further, all these
initiatives will likely incur incremental expenses and weigh on
the bottom line.
However, on a positive note, all the threats faced by the
company are mostly external. This Zacks Rank #3 (Hold) company
has a proven business model and has survived similar threats in
the past quite well in some other brands and geographies.
Further, Yum! remains relatively well positioned in the US and
Another industry behemoth
), which reported last week, missed the Zacks Consensus Estimates
on both lines. Two other restaurateurs,
Red Robin Gourmet Burgers Inc.
The Wendy's Co.
) will report next month.
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