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The Science of Hitting
The Science of Hitting
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Yum! Brands Q3 Results - "A Tale of Two Cities"

October 05, 2011 | About:

On Wednesday, Yum! Brands (NYSE:YUM), the world’s largest restraint company in terms of system restaurants (with nearly 38,000 in 110 countries) reported Q3 2011 results. While many people know about Yum! and their progress in China, I found a statistic from their recent China Investor Conference Presentation that really blew my mind: In 2001, there were 548 KFC’s in China, compared to 412 for McDonald’s (MCD); since then the total number of Mickey D’s has tripled to 1291, certainly not anemic growth. KFC, on the other hand, has increased their number of locations nearly six-fold, to 3246 (up to 3,475 as of today’s conference call). Here are some of the highlights from the conference call and the press release:

In the words of CFO Richard Carucci, the quarter can be summed up as such: “During the first 2 earnings calls this year, I categorized our 2011 results as a tale of two cities. Strong international growth, especially in China, has been a contrast to poor U.S. performance. This quarter is essentially more of the same.”

For the quarter, company sales increased 14% to $2.85 billion, from $2.5 billion in Q3 2010. In the China Division, system sales increased 29%, prior to foreign currency translation, driven by same-store sales growth of 19% and new unit development (138 in the quarter). On China’s growth, here is what CEO David Novak had to say: “New unit development continues to be the major driver of our growth, and we remain the largest U.S. retail developer in China. We've opened 329 new units through our first 3 quarters and expect to open a record 600 this year, which will be record development year for us in China. Our China new unit returns remain a key focus for us and continue to be the best in our business.”

In the Yum! Restaurants International (YRI) division, system sales increased 8% (prior to foreign currency translation) driven by 3% same store sales growth and new unit development (with 193 opened in the quarter). Inside the division, the split was between 13% system sales growth in emerging markets (7% same store sales growth), and 4% system sales growth in developed markets (2% same store sales growth). As in the China division, growth, growth, and more growth, is the company’s strategy: “We continue to expect to open about 900 new units at Yum! Restaurants International for the full year… It's the new unit development, specifically in emerging markets, that sets Yum! apart and is positioning YRI for many successful years in the future.”

In the U.S. Division, same-store sales declined 3%, with all three brands ending in negative territory: 2% at Taco Bell (following a decline of 5% in Q2), 3% at Pizza Hut, and 3% at KFC. In the words of Mr. Novak, “In the U.S., we saw another quarter of poor results in what remains a tough environment”. In Q4, management expects sales “will remain a challenge”, and that we will likely see another same store sales decrease.

For the third quarter, EPS came in at $0.83, a 13% increase compared to $0.73 in Q3 2010. Including special items (related to the impairment to Pizza Hut UK and the planned sale of LJS and A&W), the EPS figure was $0.80, a year over year increase of 8%. For the full year, management reaffirmed their EPS growth guidance of at least 12% (excluding special items); if this ends up happening, it will mark the 10th consecutive year that the company achieved 10% plus EPS growth.

The stock declined 2.67% for the day, and closed slightly above $48 per share.

About the author:

The Science of Hitting
I'm a value investor with a long term focus.

As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."

I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.

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