Yum! Brands: Q2 Results Better Than Feared; Maintain Buy Rating
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Yesterday, Yum! Brands (NYSE: YUM) reported results for the second quarter ended June 16, 2012. Reported EPS for the quarter was $0.69, missing the consensus estimates of $0.70 by a penny. The benefit of a lower than expected tax rate ($0.02) was offset by a one-time pre-tax charge of $17 million (or $0.02 per share) related to the resolution of an employment lawsuit in California at Taco Bell.
Strong international development continued with the opening of 342 new restaurants in Q2, including 160 in China and 172 at YRI. 81% of this development occurred in emerging markets. Worldwide operating profit grew 7% prior to foreign currency translation (8%, after foreign currency translation), including 26% in the U.S. and 6% at YRI. However, there was a 4% decline in operating profits in China. The company posted good same store sales growth in all its divisions.
2Q Same Store Sales
|
YUM U.S. |
YUM Restaurants International |
YUM China |
YUM India |
|
7% |
4% |
10% |
7% |
Source: Company Reports
YUM’s 2Q results were a bit better than many investors feared. There still are some concerns around global macro headwinds, particularly in China, posing a risk to sales, margins and earnings. But, we maintain our stance (See: Yum Brands Will Remain Yummy Despite of Chinese Slowdown) that the company will be able to overcome these challenges.
Going into the second quarter, investors were worried about slowing Chinese same store sales due to a reduced GDP outlook in the country. However, contrary to the common notion, China’s SSS rose a healthy 10% (driven by 6% traffic gain and 4% pricing) and accelerated up 28% on a two year basis compared to 27% last quarter. There are some concerns over Chinese margins, which fell about 400 basis points to 15.6% during the quarter due to 13% wage rate inflation, 6% commodity inflation, a later than expected price increase and investments for aggressive unit growth. We expect the decline to be short term in nature, as management expects margin expansion in 2H12 due to moderating commodity prices and an additional 7.0% price increase in Q3 and 4% price increase in Q4.
On the US front, the company’s business appears to be well positioned. Expectedly, in this quarter, US operating profit rose 39% (excluding the Taco Bell lawsuit pre-tax charge of $17 million), with all three divisions posting positive SSS growth for the second consecutive quarter. Taco Bell was the major contributor with 13.0% SSS growth, followed by Pizza Hut, up 4.0%, and KFC, up 1.0%. Taco Bell's impressive growth has been boosted by the successful launch of the Doritos Locos taco. Although results are not expected to continue in the double-digit range, we believe sales will continue to hold up well with the current momentum, as well as with the introduction of the Cantina Bell menu earlier this month and the continued roll out of breakfast. This will further help YUM to compete and gain market share from high growth Mexican food chain Chipotle Mexican Grill (NYSE: CMG) and Jack in the Box (NASDAQ: JACK) owned Qdoba Mexican Grill.
JACK and YUM are trading at similar forward P/E ratios of 17.37 and 17.52 respectively. YUM’s U.S. SSS growth of 4% is a little more than what Qdoba’s is expecting this quarter (in 3%-4% range). The company's strong growth prospects in India and other emerging markets, along with its immunity to changing consumer preferences due to brand diversification, further put it into a better position. Also, if the cantina bell menu is able to gain significant consumer traction in the future, we could possibly see YUM trading at a 20+ forward P/E. Thus, we maintain our buy rating on this stock.
Note: The article was originally published on TheAnalystHub.com. For more in-depth research articles please visit our site today.
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