BAML in one of its recent reports state that their analysts are in the strange position of having an Underperform rating on Yum! Brands, Inc. (NYSE:YUM) shares and also the high-on-the-Street EPS estimate for Yum! Brands’ 2Q, which will be reported after the close on Wed., July 10th, with a conference call on July 11th.
BAML’s 2Q EPS estimate is $0.61, down about 8% versus last year’s 2Q EPS of $0.67. Consensus is at $0.54, down 19% year over year, and directionally in line with Yum! Brands, Inc. (NYSE:YUM)’s guidance for a “significant double-digit decline” in 2Q EPS. Earnings pressure will stem from a previously reported 20% decline in Yum China’s 2Q (Yum China’s 2Q is comprised of the three months ended May) same-store sales, including KFC China down 26% and Pizza Hut China up 7%.
According to the report, issues behind KFC China’s sales softness that started in 4Q 2012 include value/ promotional decisions tracing back to 2011 (great year for sales, but poor for margins); early 2013 concerns about antibiotic levels in chicken; and, more recently, chicken fears related to avian flu incidents in March/April.
Yum! had soft 2Q 2012 earnings
BAML analysts obviously expect down earnings, but the decline should be mitigated by how weakly Yum! Brands, Inc. (NYSE:YUM) performed in 2Q 2012, especially in China. Last year’s disappointing 2Q results set up an easy earnings comparison. Key factors to consider from last year’s 2Q include: 1) less than 1% EPS growth ($0.67 versus $0.66 in 2Q 2011); 2) flat operating income from China, with restaurant level margins down 410 bps from 2Q 2011 and 100 bps lower than Yum’s 1Q 2013 experience; 3) disappointing Yum Restaurants Int’l (YRI) earnings performance in 2Q 2012, reflecting some one-time re-organizational charges and soft results in France and Thailand; and 4) $0.02 of charges tied to California employment litigation.
According to BAML’s report, if Yum! Brands, Inc. (NYSE:YUM)’s earnings exceed consensus, the shares may react positively. Given the factors above, BAML expect Yum! Brands, Inc. (NYSE:YUM) results to approximate their high-on-the-Street estimate rather than consensus. If Yum’s 2Q EPS matches consensus, then they expect to have more conviction that full-year earnings estimates are high. Research firm’s full-year EPS estimates are $3.00 for 2013 and $3.60 for 2014, compared to consensus of $3.07 and $3.77, respectively.