Friday, July 8, 2011

Yum! Brands, Inc. (NYSE: YUM): Q2 Earnings Preview 2011

Yum! Brands, Inc. (NYSE: YUM) is scheduled to release its second-quarter earnings after the closing bell on Wednesday, July 13, 2011. Analysts, on average, expect the company to report earnings of 61 cents per share on revenue of $2.70 billion. In the year ago period, the company reported earnings of 58 cents per share on revenue of $2.57 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.

The company has seen net income rise in three straight quarters.R evenue has risen in the past four quarters. 

In the preceding first quarter, the Louisville, Kentucky-based company's net income was $264 million, or 54 cents a share, compared to $241 million,or 50 cents a share, in the year-earlier quarter. On an adjusted basis, the company earned 63 cents a share in the latest quarter. Revenue increased 3% to $2.43 billion from $2.34 billion. Analysts, on average, expected the company to report earnings of 64 cents per share on revenue of $2.40 billion.

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

The restaurant chain operator has enjoyed strong growth in international markets in recent years. It opened 507 new restaurants in China and 884 in other countries outside the U.S. last year. 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.Yum has built KFC into a leading fast-food brand in China, and the chain's same-store sales in China rose 5 percent for the year, benefiting from initiatives that included breakfast offerings, delivery and 24-hour operations. "We're well on our way to our China business becoming a $1 billion operating profit division for us in the very near future," Yum spokesman Jonathan Blum said recently in an interview.

The company expects China to surpass 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 3,900 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. The company opened 507 new restaurants in China last year. Apart from China, the company is also expanding in new markets including India, France, Russia and Africa.

Yum recently announced that it will seek to buy all outstanding shares in hotpot-restaurant operator Little Sheep Group Ltd. to further expand in China. Yum may bid for all shares that it doesn’t already own or are held by parties acting in concert with it. The U.S. restaurant operator increased its Little Sheep stake to 27.2 percent from 20 percent last year. Little Sheep’s 2010 net income gained 21 percent.

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 into profits.

The company's stock currently trades at a forward P/E (fye Dec 25, 2012) of 17.24 and PEG ratio (5 yr expected) of 1.54. In terms of stock performance, Yum shares have gained nearly 12 percent since the beginning of the year.  

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