Leading restaurateur Yum! Brands Inc. (YUM) posted mixed fourth-quarter 2013 results. The company’s higher earnings growth shows that it is slowly recovering from its bad phase. However, the weak performance by the China division remains a concern.
The company’s adjusted earnings of 86 cents per share beat the Zacks Consensus Estimate of 80 cents by 7.5% and the year-ago quarter’s earnings of 83 cents by 4%. Earnings in the quarter received a boost from the company’s solid YRI business and higher worldwide operating profit results.
In the fourth quarter, total revenue went up 1% year over year to $4.18 billion. However, quarterly revenues fell short of the Zacks Consensus Estimate of $4.23 billion by nearly 1.2% which we believe is due to lower same-store sales performance at the U.S. and China divisions.
China has been the largest contributor to Yum! Brand’s revenues. In Dec 2012, the company’s China Division — accounting for more than double of its U.S. revenues — faced an allegation regarding the quality of chicken supplied to its KFC restaurants. The resultant adverse publicity continues to affect the division’s performance since fourth-quarter 2012. To add to the woes, the outbreak of avian flu in China in April last year also hurt the segment’s sales.
Comps Discussion
Geographically, Yum!’s business includes four reporting segments: the United States, the China Division, consisting only of mainland China, Yum Restaurants International (YRI) and India.
China Division’s comps declined 4% in the fourth quarter which was better than a 6% fall in comps in the year-ago quarter. Quarterly fall in comps was caused by a 4% drop in KFC comps owing to the unfavorable impact of the poultry supply issue, partially offset by a 5% comps rise at Pizza Hut Casual Dining.
The U.S. Division’s comps were down 2% for the fourth quarter, much lower than the year-earlier quarter’s comps growth of 3%. The lower comps resulted from a 4% and 5% decline in the comps at Pizza Hut and KFC, respectively, offset by 4% rise in the same at Taco Bell. Taco Bell has been posting positive comps for the past eight quarters. Management expects Taco Bell to grow further in the U.S. with the ongoing investment in technology and equipment.
Comps at the India Division were down 1% for the quarter versus 5% comps growth in the year-ago quarter.
Comps nudged up 2% in the YRI Division resulting from a 3% growth in comps at the emerging markets and 1% rise in the same at developed markets.
Margin & Costs
In the reported quarter, Yum! Brands witnessed 1% fall in its total costs and expenses, net mostly due to the 4% decline in the cost related to payroll and employee benefits. The company-restaurant expenses remained flat year over year at $3.0 billion as higher restaurant cost at the China division was offset by significantly lower expenses in the company’s U.S. and YRI divisions.
Worldwide operating profit increased 2% in the quarter, excluding foreign currency translation, mainly due to a respective 5%, 11% and 2% rise in the China, YRI and U.S. Division’s profit.
Restaurant margin fell 200 basis points (bps) to 14.2% as a result of 140 bps and 30 bps drop in YRI and the U.S. Division’s restaurant margin, respectively, offset by 40 bps rise in the China Division’s restaurant margin.
Share Repurchase & Dividend
Year-to-date, the company has bought back 10.9 million shares worth $750.0 million. During the fourth quarter, YUM! raised its quarterly dividend by 10% to $1.48 per share.
Unit Growth
The company has a solid development pipeline. Yum! opened nearly 1,200 restaurants outside the U.S. in 2013, a large portion of which is located in emerging markets. The company unveiled 740 restaurants in China alone in 2013.
The company has restructured its business divisions effective January 2014. According to the reshuffling, the company will be merging its Yum! Restaurants International (YRI) and the U.S. divisions for each of its three brands — KFC, Pizza Hut and Taco Bell. However, the company will continue to operate its other two divisions — Yum! Restaurants China and Yum! Restaurants India — separately on expectations of potential growth.
From the beginning of fiscal 2014, Yum! Brands will be posting its financial results for the following divisions — KFC, Pizza Hut, Taco Bell, Yum! Restaurants China and Yum! Restaurants India.
Full Year 2013 Highlights
For full-year 2013, YUM! reported earnings per share of $2.97, down 9% year over year and revenues of $13.1 billion, down 4% year over year. Comps at China were down 13% due to the poultry supply incident.
Outlook
Management expects its business to pick up speed from 2014 onward driven by its new sales-driven initiatives. The company expects to achieve a 20% earnings growth in 2014.
Our Take
Though management expects a strong performance in the years ahead, we believe that there is an uncertainty regarding the proper pace of recovery. However, on a positive note, we are encouraged about the company’s improving fourth quarter earnings results.
YUM! Brands presently has a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry include Fiesta Restaurant Group, Inc. (FRGI), Jack in the Box Inc. (JACK) and Buffalo Wild Wings Inc. (BWLD). While Fiesta Restaurant carries a Zacks Rank #1 (Strong Buy), Jack in the Box and Buffalo Wild Wings carry a Zacks Rank #2 (Buy).
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