Tuesday, February 1, 2011

Yum! Brands, Inc. (NYSE: YUM): Q4 Earnings Preview 2010

Yum! Brands, Inc. (NYSE: YUM) is scheduled to release its fourth-quarter earnings after the closing bell on Wednesday, February 2, 2011. Analysts, on average, expect the company to report earnings of 60 cents per share on revenue of $3.50 billion. In the year ago period, the company reported earnings of 50 cents per share on revenue of $3.36 billion.

YUM! Brands, Inc., together with its subsidiaries, operates as a quick service restaurant company worldwide. Through the five concepts of KFC, Pizza Hut, Taco Bell, LJS and A&W (the Concepts), the Company develops, operates, franchises and licenses a worldwide system of restaurants, which prepare, package and sell a menu of food items.

In the preceding third quarter, the Louisville, Kentucky-based company's net income was $357 million, or 74 cents a share, compared to $334 million, or 69 cents a share, in the year-ago quarter. On an adjusted basis, the company earned 73 cents a share in the latest quarter. Revenue rose to $2.86 billion from $2.78 billion in the same quarter last year. Analysts, on average, had expected the company to report earnings of 73 cents a share on revenue of $2.87 billion. 

At its last earnings call in October, the restaurant operator boosted its 2010 earnings guidance to $2.48 per share from its prior outlook of $2.43 per share. In December, the company reaffirmed that it is on track to post 14 percent earnings-per-share growth in 2010, helped by new restaurant openings in China and its other international markets.

The company expects to deliver at least 10 percent EPS growth in 2011, excluding special items, which would mark its 10th straight year of meeting or exceeding this annual EPS growth target.

Recently, the company's board approved the share repurchase of an additional $750 million.  Yum will buy back shares over the next 18 months. The company currently has $130 million of share buyback remaining under the $300 million share repurchases authorized by the board in March 2010. Year to date, ended September 4, 2010, Yum repurchased $7.6 million for a total of $283 million.  Since 2004, the company has returned over $1 billion and $6 billion via dividend and share repurchase programs, respectively.

The restaurant chain operator has enjoyed strong growth in international markets in recent years. Yum Brands has particularly gained immensely from growing Chinese appetite for American fast food. China's growing middle class and rising per capital income offers tremendous potential for further growth of the company. At the time of its spin off from PepsiCo, just 22% of its profit came from international operations, a figure that has since nearly tripled to 65% and is expected to hit 75% by 2015. Yum's China business is very lucrative, with margins topping 20 percent.

Recently, the company said that China would surpass the United States as the fast-food restaurant operator's top profit generator this year, even as the Chinese market's potential remains largely untapped. Yum has more than 3,700 restaurants, mostly KFC outlets, in China and has a big lead over Western rivals like McDonald's Corp (NYSE: MCD) in the world's fastest-growing major economy. The company aims to open more than 20,000 restaurants in China.

Yum!'s chief of India operations said in November he expects revenue to grow between 35% and 45% in 2011. Comparable same-store sales, or sales at stores open at least one year -- a closely watched metric in the restaurant industry -- should increase in the mid-teen percentages, Niren Chaudhary told Reuters at the World Economic Forum's India summit. 

Yum expects to build 475 new restaurants in China next year and 900 outlets in its other international markets, from Europe to Asia and Africa.

Yum Brands recently announced that it has put restaurant chains Long John Silver's and A&W All-American Restaurants up for sale as it pushes to expand in international markets. Yum! said the divestments come as it narrows its focus for long-term growth plans toward greater expansion in China and other international markets while concurrently growing sales at Taco Bell, Pizza Hut and KFC in the U.S. Yum! said that it "does not expect the eventual sale to have a material impact to its ongoing earnings or cash flow."

However, the fast food chain is facing pressure in United Sates as heightened competition and escalating price-war in fast food space could erode the company's bottomline. Moreover, costs for labor and commodities like chicken are on the rise and could bite profits.

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