YUM - TOP 10 TAKAWAYS FROM THE QUARTER

Post-market, YUM is trading up 3-4% on 2Q11 earnings of $0.66 ex-items vs consensus of $0.61 and guidance of EPS growth of at least 12%, or $2.83 versus prior guidance of at least 10% growth.  Without the amazing sales trends in China, and a lower-than-usual tax rate, the quality of the EPS was suspect. When it’s all said and done, I don’t believe the stock will be up much tomorrow.  Below are ten quick takeaways from the quarter; with more detail to follow tomorrow after the call.

1. Consolidated revenues gained +9% year-over-year, operating profit declined -2% and pre-tax income increased +1%.  Net income was up 10% and EPS gained +11% y/y.
2. China was strong with reported system sales growing +34% and sales excluding the impact of FX gaining +28%.  Same-store sales came in at +18% versus consensus of +10.8% (SSS for KFC +17%; Pizza Hut +22% and same-store transactions +21%).  On a two-year basis, same-stores accelerated 11%, up 250pbs sequentially.
3. Despite these strong sales trends, China restaurant level margins were 19.7% vs 20.1% last year.
4. YRI was in line with reported system sales +13% and +6% excluding FX (Emerging markets sales +11%; Developed markets +4%).  Same-store sales were +2% versus consensus of +1.6%.  YRI restaurant margins were 12.6% vs 10.5% last year.
5. The YUM USA was an unmitigated disaster: Comps declined -4% versus consensus -1.6%. (KFC -5%; Taco Bell -5% and Pizza Hut -2%.  Restaurant margin decline 4.4% to 11.8% and operating profits declined 26%.  On a 2-year basis, same-store sales in the USA were -2%.
6. YUM USA brands are in secular decline.  EBIT growth, on a year-over-year basis, has declined 7 of the last 12 quarters.
7. USA represented 28.8% of operating profits in 2Q11, down from 41.3% last year.  China grew to 39.7% from 31.2% last year.
8. The EPS beat was due to lower interest expense and a lower tax rate (the tax rate declined to 16.7% from 23.6%).  Interest expense was down 16.7% YoY.  
9. Deflating the inflation in China - margin compares get easier in 2H11, while same-store sales should continue to be strong. 
10. Before long, it will not make sense for YUM to be headquartered in Louisville KY.

We will have more details on the quarter and how we think 2H11 will shake out after the call tomorrow.

Howard Penney

Managing Director

Rory Green

Analyst