Yum Brands' (YUM) Strong Domestic Sales Offset Weak Chinese Numbers

Yum Brands (YUM: Charts, News), the parent company of KFC, Pizza Hut and Taco Bell, reported its second quarter earnings last week, missing analysts' estimates due to a rare slump in Chinese sales. The Louisville, Kentucky-based company posted adjusted earnings of 67 cents per share, missing the consensus by 3 cents.

Same-store sales across all markets increased an average of 10%, while revenue rose 27% to $3.2, exceeding estimates. Daily Chart
Yum generates over half of its revenue from China, which has been a fertile market for its KFC and Pizza Hut brands. During the second quarter, Yum opened 160 new stores in China with a forecast of over 700 new openings this year, up from its previous forecast of 600 stores. These openings are expected to weigh on earnings over the year due to higher expenses. Operating profit in China slumped 4% during the quarter. Operating margins also slid by 4.1% due to higher commodity costs. Yum now operates 3,900 KFC and 700 Pizza Hut locations in China. Yum expects margins to firm up in the second half of the year when Chinese inflation subsides. CEO David Novak expects the Chinese market to rebound within the year. "We expect this to be short lived as our menu initiatives, including pricing, begin to take hold and inflation moderates," stated Novak. Novak forecast that profit growth in China would return to double-digit growth during the second half of the year, while same-stores sales would remain in a mid-single-digit range. To maintain its margins, Yum, like its rival McDonald's (MCD: Charts, News), has been forced to raise prices in China. Yum raised prices by 3-4% across its menu. Yum also increased the number of 24-hour locations in China, which increased its labor costs. Currently over half of KFC's Chinese locations are open 24 hours. Meanwhile, its domestic business was rejuvenated by the popularity of new menu items at Taco Bell, including its best-selling Doritos Locos Tacos. Operating profit in the U.S. surged 26%, with Taco Bell being the clear leader with a 13% increase in same-store sales. Pizza Hut trailed at 4%, while KFC barely grew at 1%. Same-store sales in the United States grew by 7%. However, revenue dipped 7% to $818 million from the prior year quarter. Looking ahead, Yum intends to open a total of 1,700 international locations during the second half of the year. India and Africa remain its top priorities, where it hopes to repeat the success it has experienced in China. Yum acquired 70 restaurants in South Africa last year, and views comparatively wealthy Nigeria as a major growth opportunity. Yum also holds minor markets in Japan, Russia, Germany and France. The company reaffirmed its full-year forecast of EPS growth of at least 12%, but Novak also warned of a "bumpy" third quarter due to the costs of expansion. Shares of Yum trade at 17.4 times forward earnings, with a 4-year PEG ratio of 1.44. This makes it fundamentally more expensive than McDonald's shares, but Yum's footprint in China, compared with McDonald's massive European exposure, make it a more attractive growth stock. Yum currently operates 218 KFC restaurants in France and Europe, compared to McDonald's 2,600 locations across the continent. Yum stock also pays a quarterly dividend of 28 cents per share, a 1.7% yield at current prices. Other News About YUM Yum's Profit Disappoints, Hurt by China Costs Yum's strong domestic earnings get weighed down by Chinese woes. Yum! Brands' Q2 Growth Overshadowed by China Woes Yum remains optimistic regarding its largest market. Other Stocks in the News Chipotle Burned By Slowing Burrito Sales Growth Has fundamental gravity finally caught up to Chipotle's stock? Samsung Judge to Apple: Admit You Were Wrong The acrimonious battle between Apple and Samsung continues. Copyright 2012 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA InvestorGuide.com, Inc.) or its employees responsible.

Published on Jul 23, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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