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Will China Weigh on Yum! Brands' (YUM) Q3 Earnings?

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Yum! Brands, Inc.YUM is set to report third-quarter 2015 results on Oct 6. Last quarter, the company posted a positive earnings surprise of 9.52%. In fact, the company has posted an average positive earnings surprise of 3.91% in the trailing four quarters.

Let's see how things are shaping up for this announcement.

Factors at Play

Yum!'s China Division is still reeling from the negative impact of the food safety scandal that took place in Jul 2014. This scandal affected consumer confidence and lowered comps in the months that followed. Since then, the company has been witnessing sales declines at the KFC and Pizza Hut units in the country.

Although the Louisville-based restaurant chain expects comps in China to recover in the second half of 2015, a drastic turnaround is not expected due to the slowdown in the Chinese economy. Competition from local companies would add to Yum!'s woes.

Nevertheless, we believe that the company's U.S. division is poised to perform better in the to-be-reported quarter. Taco Bell's menu innovations and the hugely popular breakfast platform should drive comps, while Pizza Hut's comps will likely grow supported by the massive makeover which took place in Nov 2014. KFC has also revamped its outlets in May this year and launched an improved online site, which should boost third-quarter comps.

Earnings Whispers

Our proven model does not conclusively show that Yum! Brands is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP : The company's Earnings ESP stands at -3.70%. This is because the Most Accurate estimate stands at $1.04 and the Zacks Consensus Estimate is pegged higher at $1.08.

Zacks Rank : Yum! has a Zacks Rank #3 which when combined with a ESP of -3.70% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Here are some companies in the broader retail sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Macy's, Inc. M , with an Earnings ESP of +6.25% and a Zacks Rank #3.

Panera Bread Company PNRA , with an Earnings ESP of +0.76% and a Zacks Rank #3.

Starbucks Corporation SBUX , with an Earnings ESP of +2.33% and a Zacks Rank #2.

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PANERA BREAD CO (PNRA): Free Stock Analysis Report

YUM! BRANDS INC (YUM): Free Stock Analysis Report

MACYS INC (M): Free Stock Analysis Report

STARBUCKS CORP (SBUX): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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