Yum 1Q12 Earnings Preview: Expect Solid Sales From China, US Sees Signs Of Stabilization

| About: Yum! Brands, (YUM)

YUM! Brands (YUM) reports 1Q12 results on April 19. The Street expects the company to earn $0.72 per share on $2.7 billion in revenue, and guide $3.1 billion for Q2.

Last quarter YUM reported:

  • Revenue: $4.1 billion, +15% y/y
  • Operating profit: $507 million, +15% y/y
  • EPS: $0.75, +33% y/y
  • Worldwide systems sale grew 11% prior to FX translation, which includes 33% in China, 10% in YRI and 6% in the US.
  • Same-store sales grew 21% in China, 3% in YRI and 1% in the US

Heading into earnings, investors can expect continued solid sales from China and signs of stabilization in the US.

China comps sales will likely come out strong, despite the early start of the Chinese New Year, and I expect China SSS to come in about 11%, compared to the consensus of 9.5%, due to stabilizing GDP growth, menu pricing, and new product mix. Last year, YUM opened 656 new restaurants in the region and achieved a comps sale of 19%. Despite being the largest foreign QSR in the country, the company still has significant growth upside. I note that YUM has 60 restaurants per million people in the US, while only 3.5 restaurants per million people in China. With the majority of restaurants located in China's large cities, smaller Tier-2 and Tier-3 cities offer compelling growth opportunities amid rising disposable income.

Taco Bell is showing positive comps in 1Q12, according to management during 4Q11 conference call. One major problem with Taco Bell is due to lack of new product pipeline. However, it is encouraging to see that the newly introduced Doritos Locos Tacos is beginning to win the perception of Mexican QSR patrons since its launch in early March.

Finally, investors should look for more color on the Little Sheep acquisition. Little Sheep operates a chain of hotpot restaurants across China and several international locations such as the US, Canada and Australia. The biggest concern was the weak comps in 2011 that showed deterioration of the business, and management needs to provide investors more color on how it plans to turn the business or integrate it into the YUM portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.