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Over the past three years, YUM has not made any changes to its long-term earnings growth model. On an ongoing basis, the company still expects to generate 10% EPS growth, with China, YRI and the U.S each contributing operating profit growth of 20%, 10% and 5%, respectively. For reference, in the last 3 years, China and YRI have met and/or exceeded these targets while the U.S. has fallen short. The U.S. has not achieved 5% operating profit growth since 2002 and has been negative in four of the last six years. So, needless to say, growth in China and YRI have more than offset the weakness in the U.S. as the company has consistently grown EPS by at least 10% on an annual basis. In 2008, the U.S. accounted for about 40% of segment operating profit while China and YRI combined represented about 60% (YRI 30%, China 30%). YUM maintains that China’s operating profit contribution will continue to grow over time and should account for 40% of total company profit by 2017 (with the U.S. moving to 30%).

This is not new news and is the reason why investors have focused so much on YUM’s growth opportunities in both China and YRI, particularly as the U.S. economy has slowed. YUM’s international growth matrix has provided balance. What is new news is that in 2009, YUM expects China operating profit growth to slow to 15%-20%, YRI to decline 5% on a reported basis (up 10%, excluding foreign currency) and the U.S. to grow 15% (up 5% before expected G&A savings). YUM’s ability to achieve 10% EPS growth in 2009 will rely more heavily on the company’s growth expectations in the U.S. And, based on both the company’s track record of over promising and under delivering in the U.S. (please see post from yesterday) and YUM’s underperformance in the U.S. since 2002, this reliance on the U.S. significantly raises the risk that YUM will fail to meet its expectations.

Management stated a couple of times that its 15% operating profit goal for the U.S. in 2009 does not require heroic results out of KFC as it requires only 4% margin accretion (largely from KFC) or 5% operating profit growth from Taco Bell, Pizza Hut and KFC with the balance of the growth coming from its expected G&A savings. Although Taco Bell and Pizza Hut are expected to meet the company’s 5% operating profit target in 2008, KFC is expected to decline significantly. KFC’s same-store sales declined 4% in 3Q08 so getting to mid-single digit same-store sales growth and 5% operating profit growth in 2009 will require a dramatic turnaround even in light of the easy comparisons. As I have said numerous times before, in today’s difficult operating environment, easy comparisons no longer mean anything. Additionally, the company is still facing commodity headwinds in 2009, particularly in 1H09, which will make it even more challenging to grow margins in the U.S.

Add to the risk associated with growth in the U.S., the fact that YUM does not currently have any plans to buy back stock in 2009 so financial engineering will play less of a role in achieving targeted EPS growth than it has in the past. I cannot argue against wanting more liquidity in today’s environment. I do think management should have come to this conclusion sooner, however, rather than having levered up so significantly in 2008 to buy back nearly $1.7 billion of stock. Management highlighted that it will re-evaluate the credit markets and reconsider buying back stock and/or paying down debt in 2H09 if prudent so there could be some financial engineering to get to that 10% EPS growth after all.