Yum! Brands, Inc. (YUM) Falls On Muted Outlook

The share price of Yum! Brands Inc. (YUM) slipped 2.7% on Dec 3, 2013 after the company provided a soft financial outlook for 2014. Moreover, the company provided an update on same-store sales for the month of November. The company will hold its investor day today.

Yum! which operates fast food concepts such as KFC, Pizza Hut and Taco Bell, reaffirmed its earlier projection for full year 2013 earnings. The company expects earnings to decline in a high single to low double-digit range to $2.85 to $3.00 per share. The Zacks Consensus Estimate of $2.93 falls within the guided range.

For 2014, the company expects earnings to grow 20% year over year to $3.42 per share. The number falls short of the Zacks Consensus Estimate of $3.61 which we believe is due to the setbacks at the restaurant operator’s China division.

China, which once played a pivotal role in the company’s growth story, began to falter after fourth-quarter 2012 due to bad publicity resulting from a quality issue. Poor sales at KFC China in September compelled YUM! Brands to admit that comps in the region will continue to be down in the fourth quarter. In fact, the effect was reflected in November sales to some extent.

November same-store sales increased an estimated 1% for the China Division, improving from a decline of 5.0% in October and 11.0% in September. The recent increase could be largely attributed to 7% growth at Pizza Hut Casual Dining for the month and a 16.0% increase in same store sales at KFC that lasted for the first 10 days of the month due to limited “Half Priced” bucket promotion offer. Once this offer ended on Nov 10, comps dropped 8.0%.

However, in order to boost sales, the company has aggressive plans for KFC China. With its new unit development pipeline, the company intends to strengthen its position in developing markets. It plans to open 1,850 units in 2014, including 700 in China. Also, the company has announced a restructuring program that comes in the wake of disappointing financial results for the past few quarters, primarily in the China division. As part of the reshuffling, the company will merge its Yum! Restaurants International (YRI) and the U.S. divisions for each of its three brands — KFC, Pizza Hut and Taco Bell.

Given its persistent efforts, the company expects operating profit at its China division to grow 40.0% in 2014. However, it expects foreign currency translation to have a slightly negative impact on results in 2014.

For 2014, the company expects worldwide general and administrative expenses to be up 4.0%. Capital expenditure is expected to be $1.2 billion.

The company presently has a short-term Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Buffalo Wild Wings Inc. (BWLD), Burger King Worldwide, Inc. (BKW) and Cracker Barrel Old Country Store, Inc. (CBRL). All these stocks carry a Zacks Rank #2 (Buy).