Yum! Brands Earnings: Here is What You Need to Know

Out of Louisville, Ky., after the market closed Wednesday, Yum! Brands (NYSE: YUM) published its second quarter earnings, and the results are considered mixed. The company – which runs KFC, Pizza Hut and Taco Bell worldwide – reported earnings per share at 67 cents, which missed estimates by 3 cents (4 percent), but overall revenue of $3.17 billion beat estimates by $50 million (1.6 percent). After dropping sharply early Thursday, YUM stock recovered to be up about 0.6 percent to just shy of $66 per share.

In addition to the earnings, the company reconfirmed its fiscal-year EPS forecast of at least $3.22 (up 12 percent over a year ago) and modified its new-unit prediction up to 1,700 for the year, with at least 700 coming in China alone. Operating profit was up 7 percent and margin declined from 15.8 percent to 15.2 percent. Salres grew 8 percent worldwide, sparked by a 27-percent spike in China. The company reported that a dramatic uptick in the effective tax rate (to 23.9 percent from 16.7 percent) adversely affected the company’s EPS by about 10 percent.

Yum! CEO David C. Novak said, “(W)e generated strong system sales growth in each of our divisions in the second quarter, with robust new-unit development and exceptional same-store sales growth. Operating profit increased 8% while EPS growth of 1% was negatively impacted, as expected, by a higher tax rate versus last year. Our U.S. business increased operating profit 26% in the second quarter and drove our overall operating profit growth. We expect Chinaand Yum! Restaurants International (YRI) to drive our second-half profit growth. Based on our first-half results and current solid sales trends, we reconfirm our full-year guidance of at least 12% EPS growth, excluding special items. Yum! China, our largest profit-contributing division, reported strong system sales growth of 27%. However, operating profit declined 4%, prior to foreign currency translation, as high inflation drove restaurant margins down 4 percentage points versus last year. We expect this to be short-lived, returning to double-digit profit growth in the second half of the year. Our long-term growth prospects have never been brighter as we continue to deliver consistently strong annual results. We expect this year to be our 11th consecutive year of double-digit EPS growth, prior to special items.”

The news could be positive for hedge funds like Donald Chiboucis’ Columbus Circle Investors and Bill Miller’s Legg Mason Capital Management. Columbus Circle jumped into YUM stock during the first quarter of 2012, investing nearly $117 million by the end of March, while Legg Mason was in for about $97 million.