After a few months of stagnation in the stock market, Yum Brands’ (YUM) showed a number of positive aspects that should keep investors relatively optimistic about YUM stock.
The operator of KFC, Taco Bell and Pizza Hut restaurants posted earnings results Tuesday night, and while there were some causes for concern, there were also definite signs of improvement.
Yum Brands’ earnings easily beat expectations, coming in at 69 cents per share after excluding certain items, whereas the consensus outlook was only for 63 cents. YUM stock reported revenue of $3.1 billion, missing expectations, but just by a smidgen, as the consensus outlook stood at $3.2 billion.
YUM stock rebounded following the company’s first-quarter results and is up 26% year-to-date.
YUM Stock Still Driven by Chinese Results
It appears that Yum’s extremely important China business, which accounted for well over 50% of the company’s revenue in the second quarter, continues to improve. The segment finally appears to be recovering from the KFC tainted meat disaster last year.
True, Yum’s same-store sales in China fell 10% year-over-year in the second quarter. But that was better than the 12% decline in China same-store sales 12% decline in China same-store sales that Yum reported last quarter.
On a negative note, restaurant margins at Yum’s China division came in at 14% in the second quarter, down from 19% during the prior quarter. But, again, year-over-year declines are slowing with each consecutive quarter, suggesting that YUM stock is getting its act together.
Perhaps more importantly, Yum Brands’ CEO Greg Creed said the company continues to make progress in China, and Yum reported that it expects “substantial same-store sales and profit growth [in China] in the second half given overall trends in sales and brand perceptions.”
It sounds like Yum’s China business is continuing to rebound in the third quarter, while the company is seeing signs that the effects of the food scandal are diminishing. Those developments are certainly positive for YUM stock.
In another important statement, Yum reiterated that it expects its EPS to increase at least 10% for the full year, “driven by a strong second half in China and solid brand-building initiatives underway at each of our divisions.”
Outside of China, Yum Brands reported that Taco Bell “is firing on all cylinders.” The numbers certainly justify that statement, as the brand’s same-store sales jumped 6% year-over-year, while its operating margin climbed to 29.5% from 24.8%.
Yum said that Taco Bell’s success was driven by “industry-leading innovation and a solid breakfast platform.” Consumers must be gobbling up those breakfast tacos and the brand’s newer offerings at fairly rapid rates.
Yum Brands’ Pizza Hut unit continues to stagnate. The brand’s same-store sales were unchanged versus the same period a year earlier. Yum said during its first-quarter earnings call that it is working to improve the pizza chain. But the company still has a lot of work to do to improve Pizza Hut. The brand’s weak showing was probably one factor behind the company’s second-quarter revenue miss.
But Yum Brands’ earnings show that its China turnaround is continuing, while Taco Bell’s performance is also continuing to improve. As a result, YUM stock should continue to keep pace with the market in the next couple of months.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
