Yum! Brands Inc.
) posted mixed second-quarter 2014 results. While the Chinese
division repeated its stellar performance, comps decline in the
U.S. market dampened Yum!'s results. Shares of the leading
restaurateur slid more than 2.0% in after-hour trading in response.
The company's adjusted earnings of 73 cents per share were in line
with the Zacks Consensus Estimate but 30% higher than the year-ago
quarter figure of 56 cents. The upside reflects strong
year-over-year sales and margin gains, diminishing concerns related
to the chicken supply chain issues.
Yum Brands, Inc - Quarterly EPS (BNRI) |
In the second quarter, total revenue went up 10.0% year over year
to $3.20 billion, thanks to strong comps at the China division.
However, quarterly revenues were in line with the Zacks Consensus
Estimate, as sluggish comps in the domestic market, offset a robust
performance in China.
Yum! restructured its business divisions, effective from
first-quarter 2014. The company currently reports under five
segments - China, India, KFC, Pizza Hut and Taco Bell.
China Division's comps increased 15.0%, much better than a decline
of 20.0% in the year-ago quarter and 9.0% rise in the prior
quarter. The sequential increase in comps is attributable to 21.0%
improvement in KFC comps, which was offset by flat comps at Pizza
Hut Casual Dining.
KFC is Yum!'s new reporting division that includes all KFC
restaurants except the China and India divisions. Comps at this
division were up 2.0%, up from 1.0% in the last quarter. The upside
reflects comps growth of 4.0% in the emerging markets and 3.0% in
the developed ones, partially offset by 3.0% decline in the U.S.
Comps at Pizza Hut, also a new reporting segment, declined 3.0% in
the reported quarter (excluding China and India), comparing
unfavorably with 2.0% dip in the last quarter. The downside
reflects comps decline of 4.0% in the U.S. and 2.0% in developed
markets. However, comps in the emerging markets were even.
Taco Bell, the third new reporting division, includes all Taco Bell
results except the India division. Comps at this division were up
2.0%, better than a decline of 1.0% in the prior quarter.
Comps at the India Division declined 2.0% during the quarter
compared unfavorably with a decline of 1.0% in the previous
quarter. Beginning last quarter, results of 28 franchised stores
located in Mauritius are being included in the KFC and Pizza Hut
Divisions instead of this division.
Margin & Costs
In the reported quarter, Yum! Brands witnessed 8.0% increase in
total costs and expenses, primarily due to a 10.0% increase in food
and paper costs and 7.0% increase in occupancy and other operating
Company-restaurant expenses also went up 8.0% year over year to
$2.3 billion due to higher restaurant costs in the China, KFC and
Pizza Hut Divisions, partially offset by lower expenses at Taco
Worldwide operating profit increased 23.0% in the quarter with
majority of the growth coming from China.
Brand Restaging and Unit Growth
After being plagued by chicken issues for quite some time now, Yum!
Brands has announced an aggressive and comprehensive strategy in
Feb 2014 to reinstate the KFC brand in China. It recently launched
a new menu at 4,600 KFC restaurants across 900 cities and
introduced innovative marketing strategies to improve brand
awareness and traffic. Given the strength at both KFC and Pizza
Hut, the company expects to open at least 700 restaurants in China
Outside China, the company intends to open 1,250 international
units mainly in the emerging markets. The company recently launched
breakfast menu at all the Taco Bell divisions.
Management expects its business to gather steam in 2014 driven by
its new sales-driving initiatives. The company maintained its
guidance for 2014 and expects 20% earnings growth this year. The
company also expects double-digit EPS growth in 2015 and the
China has been one of the key contributors to Yum!'s revenues over
the years. While the China division has started to show signs of
improvement, it is still not out of the woods. The economic growth
rate of China has also moderated lately making consumers cautious
about their discretionary spending. This can also restrain sales
momentum at Yum!'s all-important China division.
Going forward, we are encouraged by the company's efforts to bank
on high-growth emerging markets like Russia, Southeast Asia, Africa
and Latin America for future growth. However, we are concerned by
the company's continuous decline in comps in the U.S. The
increasing preference for healthy and nutritious foods among
American consumers, along with intense competition, is denting Yum!
Yum! Brands presently has a Zacks Rank #3 (Hold). Better-ranked
stocks in the same sector include
Chipotle Mexican Grill, Inc.
Ignite Restaurant Group, Inc.
Domino's Pizza, Inc.
). All these stocks have a Zacks Rank #2 (Buy).
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