Louisville-based restaurant chain Yum! Brands, Inc. (YUM) is set to report second-quarter 2014 results on Jul 16.
In the last quarter, Yum! delivered 3.6% positive earnings surprise driven by outstanding performance at its China division. Moreover, the company recorded an earnings beat in three of the trailing four quarters with an average surprise of 1.1%.
Why a Likely Positive Surprise?
Our proven model shows that Yum! is likely to beat earnings because it has the right combination of two key components.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +1.37%. This is very meaningful and a leading indicator of a likely positive earnings surprise for the company.
Zacks Rank: Yum! has a Zacks Rank #3 (Hold). Note that stocks with Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Yum!’s Zacks Rank #3 and +1.37% ESP makes us confident of an earnings beat.
What is Driving the Better-than-Expected Earnings?
Yum! restructured its business divisions effective from the first quarter of 2014. The company currently reports under 5 segments — China, India, KFC, Pizza Hut and Taco Bell.
In our view, the performance of the China division will drive Yum!’s second-quarter results. Although the company’s business last year in China suffered from food quality concerns and bird flu panic significantly affecting KFC sales, the restaurateur has managed to post a turnaround. The fact that the company is planning to open 700 restaurants this year in China reflects that Yum! is looking to tap the high demand in the region. Additionally, the company will face easier comparisons as a result of soft sales in China in the year-ago quarter.
Last quarter, China showed an impressive 9% growth in comps. Top line increased 17% in China and, most importantly, KFC's comparable sales went up 11%. We believe that Yum! will continue to see robust results in China in the second quarter as well. Menu innovation, marketing initiatives and aggressive expansion are expected to be the drivers.
However, in the U.S., Yum! has struggled to replicate the same success. Yum!'s first quarter witnessed a dip in U.S. comparable-store sales, hurt mainly by inclement weather at the beginning of the year. We expect the trend to continue in the second quarter too. However, the company is looking to turn its fortune around by introducing the breakfast menu at its Taco Bell division in the U.S. and promoting the Power Platform to target health-conscious consumers. Although the economic environment in U.S. is sluggish, Taco Bell looks poised to perform well. However, we remain concerned about the declining comps in KFC and Pizza Hut divisions.
Other 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 +1.15% and a Zacks Rank #1 (Strong Buy).
Chipotle Mexican Grill, Inc. (CMG), with an Earnings ESP of +2.30% and a Zacks Rank #2 (Buy).
Domino's Pizza, Inc. (DPZ), with an Earnings ESP of +1.54% and a Zacks Rank #2.
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