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Refranchising Efforts to Aid YUM! Brands' (YUM) Q2 Earnings

Zacks Equity Research

YUM! Brands, Inc. YUM is scheduled to report second-quarter 2019 results on Aug 1, before the market opens.

The company has been adopting a de-risking strategy by reducing the ownership of restaurants through refranchising. Although this will drive earnings, it is likely to have hurt the company’s revenues in the second quarter of 2019.

Its earnings surpassed estimates in three of the trailing four quarters, the average miss being 5%. However, backed by strong brand position, shares of the company have gained 43.9% in the past year, outperforming the industry’s 40.6% rally.

 

Let us find out how the company’s second-quarter results are likely to shape up.

Top Line to Suffer

YUM! Brands’ revenues in the first quarter were down 9% year over year due to a sales slump, stemming from its continued refranchising initiatives. We believe that its revenues have continued to show a downward trend in the second quarter of 2019. The de-risking strategy of the company by reducing the ownership of restaurants and expanding franchise is expected to have negatively impacted revenues in the to-be-reported quarter.

Subsequently, the Zacks Consensus Estimate for its revenues in the second quarter is pegged at $1.3 billion, suggesting a 6.8% decrease from the year-ago quarter’s reported figure.

How Will Earnings Shape Up?

Despite high costs of operations, franchising is likely to have aided YUM! Brands’ earnings in the second quarter of 2019. We note that refranchising a large portion of the system reduces the company’s capital requirements, and facilitates earnings per share growth and ROE expansion. Alongside, free cash flow will continue to grow, facilitating reinvestments to increase brand recognition and shareholder return. Remarkably, this shift to refranchising has substantially benefited YUM! Brands’ operating margin over the years.

Subsequently, the Zacks Consensus Estimate for the company’s earnings for the second quarter is pegged at 87 cents, indicating a 6.1% increase from the prior-year quarter’s reported figure.

Our Quantitative Model Predicts a Beat

YUM! Brands has the right combination of two main ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Earnings ESP: The company has an Earnings ESP of +0.38%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: This restaurant currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Yum! Brands, Inc. Price and EPS Surprise

 

Yum! Brands, Inc. Price and EPS Surprise

Yum! Brands, Inc. price-eps-surprise | Yum! Brands, Inc. Quote

Other Stocks to Consider

Here are a few other stocks from the Retail-Wholesale sector that investors may consider as our model shows that these too have the right combination of elements to post an earnings beat in the second quarter.

Builders FirstSource BLDR currently sports a Zacks Rank #1 and has an Earnings ESP of +9.66%. The company is scheduled to report quarterly numbers on Aug 1.

Abercrombie & Fitch ANF presently has a Zacks Rank #3 and an Earnings ESP of +1.50%.

Casey's General Stores CASY currently has an Earnings ESP of +0.90% and a Zacks Rank #1.

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