Zacks Investment Research downgraded Yum! Brands, Inc. (YUM) to a Zacks Rank #5 (Strong Sell) on Oct 10 after the company reported not-so-great third-quarter 2014 results. The company also lowered its earnings guidance for full-year 2014 on soft China sales.
Why the Downgrade?
On Oct 7, this leading restaurant chain reported its third-quarter results, where adjusted earnings per share of 87 cents beat the Zacks Consensus Estimate by a penny and increased 2.4% year over year. However, the increase was only due to lower taxes.
Total revenue of $3.35 billion missed the Zacks Consensus Estimate by 3% and also declined 3% year over year. The downside reflects a significant decline in comparable store sales (comps) at its China division owing to the adverse publicity associated with improper food handling practices by its supplier, Shanghai Husi Food Co. in Jul 2014.
The supplier was reportedly found using meat stored in an unhygienic manner as well as mixing fresh and expired meat. In fact, other chains in the industry like McDonald’s Corp. (MCD) had to bear the brunt of the negative publicity.
The company also reported weak comps in the quarter. Aside from the Taco Bell and KFC divisions, the company witnessed comps declines in its China, India and Pizza Hut divisions. Also, the worldwide restaurant margin of Yum! Brands declined 270 basis points to 14.9% in the quarter, due to sluggish comps.
2014 Guidance Slashed
The company lowered its earnings guidance for 2014, as it believes that China revenues will take six to nine months to recover. It further stated that though the comps are improving, they are likely to remain negative in the fourth quarter as well. Given the unfavorable scenario, Yum! Brands expects earnings to grow in the range of 6–10% year over year in 2014, much lower than the previous expectation of 20%.
Estimates also declined sharply after the company posted its weak third-quarter results. Estimates for the fourth quarter declined 14.3% for the past seven days and that for full-year 2014 went down 4.4% over the same time frame.
Other Stocks to Consider
Better-ranked stocks in the restaurant industry include Chipotle Mexican Grill, Inc. (CMG) and DineEquity, Inc. (DIN), each sporting a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment