Business

Yum! Brands, Inc. (YUM) Earnings And The Issues In China

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.

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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%.

China Issues

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.

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