After the market close yesterday, the operator of Taco Bell, Pizza Hut, and KFC fast food chains?- Yum! Brands, Inc.
(
)- reported second-quarter results.? Earnings per share, excluding special charges, grew 10% year over year to $0.50, surpassing our estimate of $0.45 and street estimate of $0.43.? On a?reported basis, EPS jumped 40% to $0.63.? Total revenue, however, tumbled 6.9% to $2,476 million. Total sales dropped 7.4%, whereas franchise and license fees and income fell 3.6%.
The growth in EPS was driven by lower labor ( down 12.0%) and food costs (down 9.5%), lower G&A expenses (down 11.4%), last year’s significant share buyback, strong operating profit growth in both China (up 14.1%; up 11% excluding FX impact) and the U.S. (up 8%), and a lower effective tax rate (12.8% in the reported quarter versus 14.9% in the prior year quarter), partially offset by a 15.3% decline in Yum! Restaurants International Division (YRI) operating profit, and a negative effect ($0.03 per share) from foreign currency translation.
Same-store sales in mainland China dropped?4%, but increased 1% in other international markets.? U.S. same-store sales fell 1%, after Pizza Hut delivered an 8% decline, partially offset by positive growth at Taco Bell and KFC following the successful rollout of Kentucky Grilled Chicken nationwide.
With cash strapped consumers dining out seldom, traffic has dampened worldwide, prompting management to lower its same-store sales growth targets for 2009.? Management now expects mainland China same-store sales to be flat for 2009, as against the original target of a 5% growth.? For its U.S. division, Yum expects same-store sales to be ‘down slightly’ compared with previous guidance of a 3% increase.? International division’s same-store sales?are now expected to increase about 3% compared to the previous guidance of 3%-5% growth.? The company, however, reiterated its full-year 2009 EPS target of $2.10, or a 10% growth.
Yum! seeks to expand globally, led by its highly profitable China operations.? The company opened 118 restaurants in mainland China and 193 restaurants in YRI in the reported quarter.? Management expects to open at least 500 restaurants in China and about 900 units in international markets in 2009.? The international markets comprise – Asia (excluding China ), Australia , Continental Europe, Latin America, France , Russia , India , and U.K.
Yum! operates in the Quick Service Segment, which has been resilient in the economic turmoil to some extent.? With lower disposable income, the consumers are shifting to Quick Service Restaurants from Upscale and Casual Dining segments because of their lower priced menu.? Yum! in the Quick Service Segment competes with Krispy Kreme Doughnuts (
), McDonald’s Corporation (
), and Chipotle Mexican Grill (
).
We maintain a Buy recommendation on the stock with a six-month price target of $34.00.
