How Yum! Earnings Are Dominated by the Coming China Split

Yum! Brands, Inc. (NYSE: YUM) reported its most recent financial results after the markets closed on Wednesday. This fast food giant is taking a bite out of earnings in terms of China, but challenging industry conditions in the U.S. contributed to somewhat softer sales. As far as 24/7 Wall St. feels, this report is really a question of guidance and how the company will finalize the China split.

Management has said that this has been a transformational year for Yum, and they further believe that the company remains on track to finalize the separation of China business with a targeted completion date in late October this year.

The separation of the company would allow for more flexibility on the Chinese front. Not to mention, there is a capital structure fully in place that is expected to return a significant amount of capital to shareholders both before and after the spin. Investors can look forward to updates on October 11th.

As for the actual earnings, the company said that it had $0.75 in earnings per share (EPS) on $3.08 billion in revenue. The consensus estimates from Thomson Reuters called for $0.74 in EPS on $3.09 billion in revenue. The same period from last year had $0.69 in EPS on $3.1 billion in revenue.

In the second quarter, the company opened 373 new restaurants worldwide, with 72% of this development occurring in emerging markets. Foreign currency translation also impacted operating profit by about $16 million.

In terms of the business segments the company reported:

  • KFC system sales increased by 6% excluding currency translation.
  • Pizza Hut system sales increased by 1%.
  • Taco Bell system sales increased 2%, driven by 3% unit growth and partially offset by a 1% decline in same store sales.

Greg Creed, CEO of Yum, commented on earnings:

Yum! Brands delivered second-quarter core operating profit growth of 7% and EPS growth, excluding Special Items, of 9%. Given our strong first-half results and current trends in China, I’m pleased to raise our full-year core operating profit growth forecast to at least 14% from 12% previously. I’m particularly pleased with the continued sales momentum at KFC China, which delivered better-than-expected same-store sales growth of 3%. This represents our fourth-consecutive quarter of positive same-store sales growth at KFC China despite the second quarter being our most difficult of the year from a historical sales overlap standpoint. Importantly, our China Division is off to a good start in the third quarter for both KFC and Pizza Hut Casual Dining, including a return to positive same-store sales at Pizza Hut Casual Dining in recent weeks.

Yum is one of those companies where there are very many moving parts. Until the China separation actually takes place, it would seem that this is what investors will focus on the most.

Shares of Yum closed Wednesday at $85.74, with a consensus analyst price target of $ and a 52-week trading range of $64.58 to $91.06. Following the release of the earnings report, the stock was up over 3% at $88.50 in the after-hours session.