Yum! Brands, Inc. (NYSE:YUM) which is slowly recovering from last December’s KFC chicken scare and subsequent avian flu fears in China, is scheduled to report its second-quarter results Wednesday, July 10, after the markets close.


Yum! Brands, Inc. (NYSE:YUM) makes much of its revenue in China, and investors have been keeping a close eye on developments there. Overall revenue dropped significantly in the first quarter, but investors will want to see some signs of a rebound in the most recent period.

Yum Becoming a Leading Global Franchise

Barclays PLC (NYSE:BCS) (LON:BARC) is lowering  EPS estimate modestly, though still above the Street. They expect ‘13 guidance for EPS down MSD to be reiterated, and believe achievable as ‘financial strategies’ should help mitigate China weakness. With China comps already reported, the challenge is assessing the margin impact from the ongoing negative comp, along with the trajectory of future recovery. More broadly speaking, the US & YRI have demonstrated consistent momentum of late, and such should prevail near term. A return to 10%+ EPS growth in ‘14 is believed conservative, with consensus at 23%.

Long term, Barclays PLC (NYSE:BCS) (LON:BARC) view Yum! Brands, Inc. (NYSE:YUM) as a leading global franchisor and believe the portfolio better served with China migrating to a more insulated franchise model. The shares are at ~22x forward vs. a 14-22x 3-year range & 18.5x average.


Yum China Dragging, May Need Insulated Franchise Model

Yum guidance is for a ‘double-digit EPS decline’ (the weakest of ’13). The focus in China with comp already reported down 20% (down 13%, 29% & 19% in Mar, Apr & May resp.), led by KFC down 26%, with PH Casual up 7%. Barclays PLC (NYSE:BCS) (LON:BARC) expect restaurant margin down 500bp+, nearing ~10%, with ongoing deleverage large on labor and occupancy, only partly mitigated by lower food costs. Beyond China, they expect U.S. comp up 2%, led by Taco Bell up 3%, lapping a 13% driven by the launch of the Dorito Loco Taco and expect U.S. restaurant margins up 175bp to 19%+. Lastly, they expect YRI comp up 2%, supporting restaurant margins up 75bp to 12.5%.

Barclays PLC (NYSE:BCS) (LON:BARC) expect ‘13 guidance culminating in EPS down MSD to be reiterated, implying a flattish 2H13. Such is driven by an assumed return to positive China comp by 4Q. As for ‘14, while formal LT guidance for 10%+ EPS growth intact, most expect large upside, with management noting in can “do a lot better” and consensus at 23%.

Street Forecast for Yum

Analysts on average predict that Yum! Brands, Inc. (NYSE:YUM) will report that revenue for the second quarter totaled $2.93 billion, or more than seven percent lower year-over-year. Earnings of $0.54 per share are also in the consensus forecast. That would be down from $0.67 per share in the comparable period of last year.

In the past 60 days, that earnings per share (EPS) estimate has remained unchanged. And note that Yum! Brands, Inc. (NYSE:YUM) fell short of consensus EPS estimates in just one of the past eight quarters. The first-quarter earnings of $0.70 per share beat the street view by more than 16 percent.

The company attributed the positive surprise in first-quarter earnings to strength in areas other than China. Yum! Brands said operating profit grew 19 percent in its international division and five percent in the United States. The share price rose seven percent following the report.