Yum Fortunes Ride With China

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Yum! Brands, Inc. (NYSE: YUM) reported first quarter 2014 results after markets closed on Monday. The fast-food restaurant operator posted adjusted diluted earnings per share (EPS) of $0.87 and revenues of $2.72 billion. In the first quarter of 2013, Yum reported EPS of $0.70 on revenues of $2.54 billion. Thomson Reuters had estimates for EPS of $0.85 and $2.8 billion in revenue.

Same-store sales at the company’s KFC and Pizza Hut outlets in China rose 9% for the quarter, with 11% growth at KFC and 8% growth at Pizza Hut. Yum owns 6, 332 restaurants in China including its Little Sheep and East Dawning chains.

The company has reorganized into five divisions: KFC, Pizza Hut, and Taco Bell divisions which roll-up revenues and earnings internationally, and a division for China and one for India. Thus, same-store sales in the U.S. portion of the KFC division fell 3%. U.S. same-store sales also fell 5% in the Pizza Hut division and 1% in the Taco Bell division.

Same-store sales also declined 1% in India although total sales rose 21% excluding currency effects.

The company’s CEO had a lot to say about China:

Yum! Brands is clearly on its way to a strong bounce-back year delivering first-quarter EPS growth of 24%. Operating profit grew 80% in China, prior to foreign currency translation, driven by strong sales and margin growth. Looking ahead, we have significant building blocks in place in China and each of our divisions to drive sales and profit growth this year and beyond. … Given the strength at both KFC and Pizza Hut, we expect to open at least 700 new restaurants in China this year as we further capitalize on our leading position in the number-one retail opportunity in the world.

Yum’s performance in the U.S. is clearly faltering even though the company claims to be “pleased” with the recent launch of its breakfast menu. The company also plans to open 1,250 new restaurants outside of China in 2014. But for all intents and purposes, as goes China, so goes Yum.

Yum did not offer any guidance, but the consensus estimates for the second quarter call for EPS of $0.72 on revenues of $3.26 billion. For the full year the EPS estimate is $3.65 and the revenue estimate is $14.53 billion.

Yum’s stock is trading up about 2.5% at $79.50, a new 52-week high, after closing at $77.48. The 52-week range is $63.16 to $78.68. Thomson Reuters had a consensus analyst price target of around $82.70 before today’s report.

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