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Yum reported 1Q12 EPS of $0.76 versus $0.73 consensus.  The negative reaction to the print was, we believe, largely due to the miss in China’s same-store sales.  YUM is priced for perfection and needed to deliver a commensurately perfect quarter.  While the company came close, it didn’t quite deliver.  The quarter was strong; EPS exceeded expectations helped, for the first time in a long time, by the U.S. Division.  Given the weather and calendar-shift benefits that helped the first quarter, the question from here is “how sustainable is the domestic business?”  Here are our initial takeaways ahead of the earnings call this morning:

  • Yum China comps grew 14% year-over-year.  The stock is up 23% YTD.  Can it work from here with China seemingly losing momentum, at least in the first quarter?  As weather helped in the U.S., did cold weather during Chinese New Year negatively impact top-line trends?
  • Yum Restaurants India same-store sales grew 8% in the first quarter.  As China growth moderates – it has to at some point – this division is set to assume a greater role in driving Yum’s global growth.
  • In the U.S., Taco Bell came in at 6% same-store sales growth.  We are concerned that the trend may not be sustainable.  How much of the boost from the new product introduction and breakfast testing will be sustained?  Is Taco Bell one quarter behind Pizza Hut – will it roll over next quarter – or is this concept truly on the mend?
  • Pizza Hut trends rolled over in the U.S.  The 5% print implied two-year trends down 700 basis points sequentially.  What is next to keep trends moving forward?
  • KFC’s U.S. results were clearly a net positive.  Same-store sales grew 2%, with the two-year average trend up 200 basis points.  Was this a weather-and-leap-year head fake?
  • YRI saw same-store sales up 5%, which brought the two year up 150 basis points to 3.5%.  The numbers are impressive for 1Q12, the first quarter that India has been broken out from this division.  Previously, it had been included within YRI.  Margin contraction on 5% comps is one data point we will be trying to understand better from this morning’s call.

 YUM PRE-CALL QUESTIONS - yum china pod1

 

YUM PRE-CALL QUESTIONS - us taco bell pod1

 

YUM PRE-CALL QUESTIONS - us pizza hut pod1

 

YUM PRE-CALL QUESTIONS - us kfc pod1

 

Howard Penney

Managing Director

 

Rory Green

Analyst