It has been about a month since the last earnings report for Yum Brands (YUM). Shares have added about 2.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Yum due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Yum! Brands Q4 Earnings Miss Estimates
Yum! Brands has delivered lower-than-expected results in the fourth quarter of 2018.
Adjusted earnings of 40 cents per share missed the Zacks Consensus Estimate of 97 cents by 58.8%. Further, the bottom line decreased 58.3% on a year-over-year basis. While the shift to refranchising substantially helped the company’s operating margin, pre-tax investment expenses negatively affected earnings in the quarter under review.
Total revenues of $1,558 million were down 1.2% year over year and also lagged the consensus estimate of $1,587 million. The downside was caused by decreased sales, owing to the company’s continued refranchising initiatives.
Worldwide system sales, excluding foreign currency translation, grew 6%, with Taco Bell at 9%, KFC at 7% and Pizza Hut at 2% in the quarter under review. Also, the company opened 865 net new units and added 1,282 Telepizza units, reflecting 7% net new unit growth. Moreover, Yum! Brands refranchised 331 restaurants, including 227 KFC and 104 Taco Bell units for pre-tax proceeds of $380 million. At the end of the quarter under review, the company’s global franchise ownership mix increased to 98%.
Yum! Brands reports under three segments — KFC, Pizza Hut and Taco Bell.
Revenues from KFC totaled $686 million, down 16% on a year-over-year basis. Comps at this division increased 3%, same as the year-ago quarter’s and third quarter’s increase.
This segment’s operating margin was up 3.8% to 37.2% year over year, owing to refranchising and same-store sales growth, partially offset by lower advertising and other franchise service revenues.
At Pizza Hut, revenues amounted to $275 million, up 18% on a year-over-year basis. Comps remained flat compared with the year-ago quarter’s increase of 1% and the third quarter’s decline of 1%.
The segment’s operating margin was down 5.7% year over year to 33.1% due to the gross up of advertising and other franchise service revenues, partially offset by refranchising.
Taco Bell’s revenues were $597 million, up 12% from the year-ago quarter. Comps rose 6%, which compared favorably with the year-ago quarter’s growth of 2%. In third-quarter 2018, the segment’s comps gained 5%.
Segment’s operating margin was down 170 basis points to 31.9% year over year.
Other Financial details
Cash and cash equivalents as of Dec 31, 2018, totaled $292 million compared with $1,522 million as of Dec 31, 2017. Long-term debt at the end of the reported quarter was $9,751 million compared with $9,429 million at the end of 2017. During the quarter, the company repurchased 7.8 million shares for $696 million.
For 2018, worldwide system sales, excluding foreign currency translation, grew 5%. This is because of a worldwide system sales growth of 6% at KFC and Taco Bell each, and 1% growth for the same at Pizza Hut.
The company opened 1,757 net new units in 2018 and added 1,282 Telepizza, reflecting 7% year-over-year net unit growth. Yum! Brands refranchised 660 restaurants — including 364 KFC, 97 Pizza Hut and 199 Taco Bell units — for pre-tax proceeds of $825 million, recording net refranchising gains of $540 million.
For 2018, the company repurchased 28.2 million shares, totaling $2.4 billion at an average price of $85.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Yum has a subpar Growth Score of D, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Yum has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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