YUM – GLOBAL “WHITE SPACE” OPORTUNITY

The Yum! Brands press release this morning raising guidance combined with the list of presenters at this week’s annual investor meeting tells us that Yum!, once again, is going to be talking growth.  I like to think of it as the global “white space” opportunity.  Yes, I’m taking a cheap shot at the bull investment case for Dunkin’ Brands, because DNKN is being propped up by a very weak case for its “opportunity” in the US.  Dunkin’ Brands is a global company but not to the extent of Yum!, McDonald’s or Starbucks.  Yum! Brands’ growth profile and sustainability outlook are superior to those of Dunkin’ Brands yet, on an EV/EBITDA NTM basis, it trades at 11x versus DNKN at 14.5x.

Yum! Brands’ theme for this week’s investor meeting is, “On the Ground Floor of Global Growth…China and a Whole Lot More.”  With respect for 2012, there is no change in the company’s earnings per share growth of at least 10%.  The familiar refrain of “opportunity to dramatically improve performance” is becoming the motto of the US Division.  While the US Division has been a disappointment for investors over the past five years or so, it is becoming less relevant over time.  The company has already reached its target of a 3:1 international operating profit-to-US operating profit ratio by 2015 albeit due to the shrinking of US profits rather than the growth of the international profitability. 

Below are some of the components of today’s updated guidance from the company:

Outlook – CHINA - operating profit growth of 15%.

  1. Double-digit units growth
  2. System sales growth of at least 13%
  3. Same-store sales growth of at least 5%
  4. Operating (G&A) leverage

Outlook - Yum! Restaurants International - operating profit growth of 10%.

  1. New unit development of 3 to 4%
  2. System sales growth of 6%
  3. Same-store sales growth of at least 2 to 3%
  4. Margin improvement and G&A leverage

HEDGEYE: If we get an update on China’s SSS in 4Q11, it will provide some cushion against those that are negative on the impact of China’s slowing economic growth impacting trends at KFC China.

Outlook - U.S. operating profit growth of 5%.

HEDGEYE: The million dollar question is, “how do they get to this target?”  While its might be the 11th straight years of hitting the 10% earnings goal, the U.S. has not been a great help to the company in that regard. 

The following is a list of presenters that will be speaking at the YUM investor conference in NYC on Wednesday:

David Novak, Chairman & CEO

HEDGEYE: Mr. Novak will give the Yum! cheer and another glowing overview of the company and its “white space” opportunity.  My guess is that he will touch briefly on the USA, but the only real news in the domestic business is that Pizza Hut is seeing some real success in November from the introduction of the “Big Dinner Box” promotion.

Rick Carucci, CFO

HEDGEYE: Mr. Carucci will go through the numbers which, we believe, will likely be impressive.

Mark Chu, President & COO - Yum! China

Angela Loh, Chief Marketing Officer - Yum! China

Lily Hsieh, CFO - Yum! China

HEDGEYE: China defines YUM and the company has the numbers to prove it.  If there is any news from China on Wednesday it will be that SSS trends in 4Q11 are “VERY” strong

Micky Pant, CEO – YRI

Martin Shuker, GM - KFC UK

Ivan Schofield, GM - KFC France

HEDGEYE: YRI represents a significant growth opportunity for YUM, 2012 will also have a restructuring componient that will incrementally help margin and profits in 2012.

Niren Chaudhary, President - Yum! India

HEDGEYE: Mr. Chaudhary is the current “rock star” at YUM with his recent promotion to President of Yum! India, a role in which he will be reporting directly to Mr. Novak.  This message from India will be yet another “white space” opportunity for YUM and the growth rate is accelerating.  

Greg Creed, CEO - Taco Bell US

HEDGEYE: I don’t want to minimize the importance of Taco Bell, but unless they give us a story about improving “the core” first, all the other initiatives are just noise.  

YUM – GLOBAL “WHITE SPACE” OPORTUNITY - pizza hut big box

Howard Penney

Managing Director

Rory Green

Analyst