Louisville-based restaurant chain Yum! Brands, Inc. (YUM) is set to report third-quarter 2014 results on Oct 7.
In the last quarter, the company reported in-line results driven by outstanding performance at its China division, partly offset by sluggish results in the U.S. division. Let’s see what is in store for us this season.
Factors to Consider
We believe that Yum! will struggle to record comps growth in the third quarter, given the negative publicity in Jul 2014 on account of improper food handling practices by its former supplier, Shanghai Husi – a division of OSI Group LLC. Shanghai Husi Food Co. was reportedly found reusing meat that had fallen on the factory floor as well as mixing fresh and expired meat. This affected consumer confidence, thereby lowering comps.
In fact, in September, the company stated that it expects the China division’s comps to decline 13% year over year in the third quarter primarily due to the above-mentioned reason. Since the scandal, the company has been witnessing sales declines at its KFC and Pizza Hut units in China.
Along with this, the company’s U.S. division remains a drag. Despite Taco Bell’s recently launched breakfast platform, which is expected to drive comps in the third quarter, sluggish comps in the Pizza Hut and KFC divisions will likely continue to hurt Yum!.
Earnings Whispers?
Our proven model does not conclusively show that Yum! is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Negative Zacks ESP: The company’s Earnings ESP stands at -3.49%. This is because the Most Accurate estimate is 83 cents, while the Zacks Consensus Estimate is pegged at 86 cents.
Zacks Rank: Yum! has a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
Here are some other companies in the restaurant sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Brinker International, Inc. (EAT), with an Earnings ESP of +2.00% and a Zacks Rank #3 (Hold).
Dunkin' Brands Group, Inc. (DNKN), with an Earnings ESP of +2.13% and a Zacks Rank #3.
Domino's Pizza, Inc. (DPZ), with an Earnings ESP of +1.64% and a Zacks Rank #3.
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