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Yum! Brands announced FY12 EPS and gave game-changing guidance on FY13 that is leading us to capitulate on our long YUM idea. 

Stepping Back From YUM

In advance of tomorrow’s earnings call, we are stepping back from our long YUM thesis.  While our initial analysis, released in November 2013 as a Black Book, was sound, the chicken supplier issue was clearly unforeseeable.  With hindsight, our mistake was defending the stock at that point, rather than taking a more prudent approach.  The reasoning behind our decision was that the government’s investigation had ceased, the stock price had declined quite dramatically, and sentiment seemed to be setting up for a strong contrarian position on the long side over the long-term TAIL duration.

Growth Story Intact, Comp Sales the Big Issue in 2013

The important component of the YUM press release was the commentary from David Novak, the Chairman and CEO.  Important points regarding China:

  • Due to continued negative same-restaurant sales, mgmt not expecting EPS growth in FY13
  • Growth strategies unchanged, globally.  Still aiming for 700 new units in China this year
  • Same-restaurant sales declined 37%, including 41% at KFC and 15% at Pizza Hut

That the company is not revising its growth targets could mean that management’s confidence in the long-term prospects of its China business is high but, given the data in the press release, we think that the bottoming process could take several quarters. 

Our Black Book, which was published the week before YUM’s analyst day, included a sum-of-the-parts-analysis suggested a value of $88 per share.  On December 6th, during the analyst day presentation, management suggested a value of between $80-90.  As of now, it is much more difficult to value this stock.  Following the call tomorrow, we expect to have a better idea of how the business should fare over the coming quarters and years.

Howard Penney

Managing Director

Rory Green

Senior Analyst