Shares of Yum! Brands Inc.YUM gained 4% in afterhours trading on Wednesday after the quick-service restaurant operator's all-important China division showed signs of a turnaround in the first quarter of 2016, with the third consecutive quarter of comps growth.
Meanwhile, the Louisville, KY-based company reported mixed first-quarter 2016 results, with earnings surpassing the Zacks Consensus Estimate but revenues missing the same. Investor confidence went further up as the company raised its operating profit growth guidance based on strong profits at the China division.
Adjusted earnings per share of 95 cents beat the Zacks Consensus Estimate of 83 cents by approximately 14.5%. Further, earnings surged 18.8% year over year owing to higher margins.
Adjusted earnings per share exclude certain charges associated with the agreement reached in 2015 with KFC U.S. franchisees and costs associated with the planned spin-off of the China operations.
Meanwhile, total revenue of $2.62 billion declined a marginal 0.1% year over year due to lower sales. Revenues also missed the Zacks Consensus Estimate of $2.67 billion by 1.6%.
Yum! Brands currently reports under four segments - China, KFC, Pizza Hut and Taco Bell. From Jan 2016, the company's India business integrated its three restaurant brands into the global KFC, Pizza Hut and Taco Bell divisions.
China division's comps increased 6%, better than last quarter's 2% growth. In the year-ago period, comps had declined 16%. The improvement was mainly backed by a 12% surge at KFC, partially offset by a 12% plunge at Pizza Hut Casual Dining. KFC China benefitted from increased demand during the Chinese New Year and the company's promotional strategies.
Comps at the KFC division were up 1%, comparing unfavorably with prior-quarter growth of 3%. Further, comps growth was lower than the 4% improvement in the year-ago quarter. Growth was witnessed across U.S. markets, developed markets and emerging markets.
Pizza Hut comps improved 3%, better than both the year-ago quarter's flat comps and last quarter's 1% increase. Comps grew 5% in U.S. markets, declined 1% in developed markets and were flat in emerging markets.
Taco Bell comps improved 1% year over year. Sluggish comps growth reflects intense competition in the domestic market, especially in the breakfast segment. The figure compared unfavorably with the prior-quarter growth level of 4% and the year-ago improvement of 6%.
Restaurant margins improved at the China, KFC and Taco Bell segments, which were partly offset by a decline in the Pizza Hut division.
Management expects 12% operating profit growth (in constant currency) in 2016, up from the prior-quarter level of 10%. Management raised its guidance mainly on the back of better-than-expected operating profits in the first quarter of 2016, which was in turn driven by strong growth at the China segment.
Although the China division has been posting positive comps for the last three quarters, a complete recovery will take more time. The economic growth rate of the country has moderated lately, making consumers cautious about their discretionary spending. This could restrict the sales momentum at Yum! Brands' China division. Further, increasing preference for healthy and nutritious food among U.S. consumers, along with intense competition, is denting the company's domestic sales.
However, the company's efforts to capitalize on high-growth emerging markets like Russia, Latin America, Asia, Middle East and Africa for future growth could partially mitigate these headwinds.
Yum! Brands has a Zacks Rank #3 (Hold).
Stocks to Consider
Some better-ranked restaurant stocks are Carrols Restaurant Group, Inc. TAST , Darden Restaurants, Inc. DRI and Dave & Buster's Entertainment, Inc. PLAY . Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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