Yum! Brands Inc.
) reported second quarter 2012 adjusted earnings of 67 cents per
share, missing the Zacks Consensus Estimate of 70 cents. Earnings
per share nudged up just 1% year over year. A hike in tax-rate,
inflated cost structure, especially in China and settlement of a
California employment lawsuit at Taco Bell were responsible for the
underperformance of earnings per share.
On a reported basis, Yum! Brands' quarterly earnings were 69
cents per share, up 6% year over year.
The company reported a 12% year-over-year increase in total revenue
to $3,168.0 million. System Sales growth in China, Yum! Restaurants
International (YRI) and the U.S. division was 27%, 7% and 1%,
respectively, excluding foreign currency translation. In YRI, India
witnessed a considerable growth of 32% in system sales.
Behind the Headline Numbers
Comparable-restaurant sales (comps) improved 10% in mainland China,
4% in YRI and 7% in the U.S. division. There were comps increases
of 13% at Taco Bell, 4% at Pizza Hut and1% at KFC. Comps increased
7% in Yum! Restaurants India.
In the quarter under review, Yum! Brands saw a spike in its overall
cost structure. Company-restaurant costs and general and
administrative (G&A) expenses increased 14% and 12%,
respectively. China and the YRI division were unable to reduce
their cost structures. However, their increases were partially made
up by a 16% cut in company-restaurant costs at the U.S. division.
Consolidated operating profit grew 8% year over year, considering
foreign-currency translation. Three major geographic segments,
China (flat year over year; and down 4% excluding foreign currency
translation), YRI (up 3%; and up 6% excluding foreign currency
translation) and the U.S. (up 26%) contributed to the growth.
While foreign currency translation helped China's operating
profit by $6 million, it bore an adverse impact of $5 million at
YRI. Operating profit at the U.S. division was affected by 1
percentage point due to the divestiture of Long John Silver's and
As expected, restaurant margin slid 4.1 percentage points to 15.6%
in China due to wage and commodity inflation as well as increased
pre-opening costs associated with geared up development. Restaurant
margin fell 1.1 percentage points to 11.8% in the YRI division,
hurt by comps decrease in KFC France, as well as increased costs
incurred due to last year's Thailand floods. However, the margin
saw an improving trend, increasing 5.8 percentage points to 17.5%
at the U.S. segment, backed by solid sales leverage.
Strong performance in the China division during the quarter was
primarily driven by 160 new openings. Further, Yum! Brands
solidified its footprint internationally by opening 172 new units
in the quarter under review, 81% of which are located in
potentially strong emerging markets.
Management has plans of opening 1700 new restaurants worldwide
this year, out of which 700 locations will be in China. Among
1000 international units, management plans to place 65% of outlets
in emerging markets with enticing growth prospects.
At quarter end, Yum! Brands had cash and cash equivalents of $984.0
million with long-term debt of $2,995 million, and shareholder
equity of $2,227.0 million.
The company reiterated its full-year 2012 earnings per share growth
expectation of at least 12.0%.
Although we still see China as a crucial player in Yum! Brands'
growth story, heightened inflation and slowdown in economic growth
concern us. China, which accounts for a major portion of
consolidated operating profit, was a dampener in the quarter.
However, these hurdles are deemed short-term by management,
which anticipates a double-digit profit growth in the latter half
of the year. Stiff competition from other quick-service restaurant
operators also remains an overhang.
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However, the U.S. segment is also rebounding slowly but steadily
mainly owing to the strong comps recorded by Taco Bell. This
success can be attributed to management's efforts to reignite the
brand through innovative initiatives.
Yum! Brands, which competes with
), currently retains a Zacks #3 Rank (short-term Hold
recommendation). We reiterate our long-term Neutral rating.