Earnings Preview: Yum! Brands Inc. (YUM) – International Performance Led by China's Brighten Outlook
By:NewsyStocks   Thursday, February 02, 2022 1:10 PM

Yum! Brands Inc. (YUM) is scheduled to release its fourth quarter earnings on Monday, February 6 after the market closes. Analysts have a consensus EPS estimate of $0.74 this quarter on revenue of $4 billion. In the corresponding year-ago quarter, Yum! Brands posted earnings of $0.63 on revenue of $3.6 billion.

Consolidated store level margin is expected to decline by 140 bp primarily due to higher food costs but partially offset by labor and other operating cost leverage. The company's Chinese segment store level margin (EBIT) is expected to decline to 16.3 percent due to higher food and labor costs, partially offset by strong sales leverage at the occupancy and other operating cost line.

On the analyst front, Raymond James reiterated their Outperform rating on YUM and has increased its price target to $66 based on an EV/EBITDA multiple of 11.5x 2012 EBITDA estimate. While the stock is trading at the upper end of its five-year historical range on both a  P/E (current 20x vs. 15-20x range) and EV/EBITDA (current 11.0x vs. 8.5-10.5x range) basis, the brokerage believes the stock can  continue to outperform fueled by continued strength in China (approaching 50 percent  of consolidated EBIT) and other emerging markets.

Third Quarter Results & Earnings History

The company reported third quarter EPS of $0.83, excluding special items. Quarterly revenue grew 13.8 percent year-over-year to $3.3 billion.

Operating profit grew 7 percent in China and 3 percent at YRI prior to foreign currency translation.  However, domestic operating profit declined 16 percent.

Worldwide system sales grew 6 percent, prior to foreign currency translation, including 29 percent in China and 8 percent at YRI.  U.S. system sales declined 3 percent.

Chinese same-store sales grew 19 percent, and 3 percent at YRI. U.S. Same-store sales declined 3 percent. Worldwide restaurant margin declined 1.9 percentage points to 17.2 percent.

During the quarter, the Company announced a 14 percent increase in its quarterly dividend.

YUM reported an EPS of $0.63 in 1Q and $0.63 in 4Q10 on revenues of $2.43 billion and $3.56 billion respectively.

Our Take

 China's transformation from a producer to a consumer economy is expected to be the key beneficiary for the company. According to Morgan Stanley estimates, consumer spending in China will triple within a decade, and with nearly 40 percent of YUM's profits emanating from China, this is one of the largest exposures any multi- national consumer companies has. We are seeing an increase in the number of bearish option bets for YUM in the days leading up to its earnings release primarily due to exceptional results from competitor McDonald's (MCD).