China May Well Save Yum's Q2 Results - Again

| About: Yum! Brands, (YUM)

By George Zack

YUM! Brands, Inc. (NYSE:YUM), which operates in the quick service restaurants industry under its flagship brands KFC, Taco Bell, and Pizza Hut, will report earnings for its second quarter of fiscal 2014 (2QFY14) after markets close today. Analysts expect revenues and earnings per share (EPS) for the quarter to improve 12% and 30% year-over-year, respectively, to $3.25 billion and 76 cents.

In the last quarter, YUM's revenues rose 7.5% to $2.72 billion, and were short of the Street's projection (of $2.79 billion) for the fifth consecutive quarter. The net income of 87 cents a share beat expectations of 84 cents, and were 15 cents better than the net income posted in 1QFY13.

A strong performance in China aided consolidated 1QFY14 results, and the company's outlook for the entire year is strong because of aggressive expansion in its largest and most promising geographic segment, China.

China - YUM's Golden Bird

The company sources close to half of its total revenues from China. In the first quarter this year, comparable store sales for YUM in the country grew 9%, led by KFC's 11% growth in comparable store sales.

YUM's top line in China improved 17%, and the bottom line increased 85% on the back of lower food costs. This suggests that YUM may have successfully weathered headwinds in 2013 that rose from food quality and bird flu concerns. These concerned had weighed down on KFC sales in FY13 and led to five straight quarters of negative comparable store sales for YUM in China, after which there was a positive surprise in the metric in 1QFY14.

Going forward, new menu items, marketing campaigns, and aggressive expansion in the country have spurred the company to open 700 new locations in the country by year's end.

Domestic Operations are a Concern

While the growth in China continues to whet investors' appetites, the company's domestic operations have been troublesome. Harsh weather and a growing trend of health consciousness among US consumers led the company's comparable store sales in 1QFY14 to decline 3% for KFC, 5% for Pizza Hut, and 1% for Taco Bell.

However, Taco Bell's growing breakfast menu offerings and its Power Platform in the US to better cater to health conscious consumers may well spark a domestic recovery for the brand.

Taco Bell is launching its Cantina Power Menu in US restaurants this Thursday. The menu doubles the meat servings to boost meals' protein content to 20 grams but keeps total calories capped to a maximum of 500.

In the upcoming post earnings conference call, investors will note how YUM fared in its most impressive and most troublesome geographic regions during the second quarter, and whether the company would re-iterate its positive outlook for FY14.

YUM stock closed 0.13% lower yesterday to $83.13. The stock is up 11% so far this year.

Disclosure: No positions.