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YUM: THE WORST IS OVER – TIME FOR THE RECOVERY

Conclusion


Despite the significant volatility the company has faced since December 2012, YUM’s long-term growth story remains intact.  Yesterday’s earnings release suggests that the fallout from the chicken supply scandal and Avian flu issues are abating. 

 

Though we will wait for further confirmation on the near-term duration, we remain confident that the long-term upside for YUM shares represents an attractive opportunity for investors willing to look past the near-term issues.  The talk of the earnings call today quickly transitioned away from the poor results in China and toward the timing of the expected recovery in sales and margins. 

 

 

2Q13 Recap


The stock traded sideways as expected.  YUM reported 2Q13 EPS of $0.56 (-16% YoY) vs. Street consensus of $0.54.  During the second quarter, YUM demonstrated impressive COGS and labor controls.  The company maintained its guidance for the balance of 2013, including a 4Q turnaround in China same-store sales trends and a mid-single digit decline in 2013 EPS.  Importantly, trends in China continue to improve with June same-store sales down only 10% after coming in down 20% in May.

 

Other 2Q Highlights

  • The effective tax rate, prior to one-time items, decreased from 23.9% to 22.1%. This decrease positively impacted EPS results by 2%.
  • Same-store sales grew 1% at YRI and 1% in the U.S.
  • Both YRI and the U.S. had 80bps of restaurant margin expansion.
  • Operating profit declined 63% in China, while it increased 12% and 4% in the YRI and U.S. divisions, respectively.
  • China restaurant level margins fell 500bps in the quarter to 10.6%. 
  • Total international development included 315 new restaurants, with 76% of this development occurring in emerging markets.

 

China


The largest short-term risk to the YUM story comes from the built in expectations that China will turn the corner in 4Q13.  China’s June sales trend was only down 10%, indicating that sales are beginning to recover and moving in the direction of current expectations.  With Pizza Hut’s June same-store sales coming in at 6%, it is clear that the brand continues to build momentum.  Although the KFC numbers leave much to be desired, the comps appear to have bottomed out earlier this quarter.  Same-store sales have improved over the course of the quarter, moving from down 26% in April to down 13% in June.  We believe that China is on track for flat to positive same-store sales trends coming out of 3Q13 and positive trends early in 4Q13.    

 

YUM: THE WORST IS OVER – TIME FOR THE RECOVERY - YUM China SSS

 

 

Rest of the World


The YRI and U.S. segments of the business continue to be solid performers and contribute to YUM’s growth profile.

 

YUM’s YRI Division reported 1% same-store sales growth, led by 5% same-store sales growth in emerging markets.  This performance was somewhat offset by weakness in the developed regions where same-store sales fell 1%.  

  • Emerging markets system sales grew 12%, driven by 8% unit growth and 5% same-store sales growth.
  • Developed markets system sales grew 1%, driven by 1% unit growth; this number was partially offset by a 1% decline in same-store sales due to weakness in Japan and the UK.
  • Restaurant margin increased 0.8% and operating profit grew 12% in the region.
  • YRI is on track for a record amount of openings this year and continues to benefit from recent asset sales.
  • Opened 205 new units in 50 countries, including 129 new units in emerging markets.

 

YUM’s U.S. Division reported 1% same-store sales growth, led by 2% and 3% same-store sales growth at Taco Bell and KFC, respectively.  Taco Bell continues to be one of the strongest brands in the QSR segment.  The brand was able to increase same-store sales despite facing a 13% comparison from last year.  Same-store sales fell 2% at Pizza Hut in the second quarter. 

  • USA same-store sales increased 1%.
  • Taco Bell same-store sales increased 2%.
  • KFC same-store sales increased 3%.
  • Pizza Hut same-store sales decreased 2%.
  • Restaurant Margin improved 0.8%.
  • Operating profit increased 4%.

 

YUM: THE WORST IS OVER – TIME FOR THE RECOVERY - Taco Bell SSS

 

YUM: THE WORST IS OVER – TIME FOR THE RECOVERY - KFC SSS

 

YUM: THE WORST IS OVER – TIME FOR THE RECOVERY - Pizza Hut SSS 

 

 

Valuation


Similar to the rest of the restaurant industry, YUM’s valuation appears stretched.  We intend to issue a report card on YUM’s road to recovery as the company continues to report monthly same-store sales trends in China.  YUM’s long-term development plans in China remain intact, particularly as the company begins to focus on establishing Pizza Hut locations in lower tier cities.  We believe that the Street will soon shift its focus away from the recent negative results in China and will begin to focus on 2014 and the timing of a margin recovery.

 

 

YUM: THE WORST IS OVER – TIME FOR THE RECOVERY - YUM EV EBITDA

 

YUM: THE WORST IS OVER – TIME FOR THE RECOVERY - YUM PE

 

 

 

Howard Penney

Managing Director

 


REPLAY: Stratfor's Top Three Geo-Political Tail Risks Featuring George Friedman

This morning we hosted an expert call with George Friedman, renowned author, Founder and Chairman of global intelligence company, Stratfor Enterprises.   

 

George walked through "Stratfor's Top Three Geo-Political Tail Risks" with focused discussion on key risks and current geopolitical dynamics in the U.S.,  Europe and China.   30 Minutes of QA follow George’s prepared remarks at the 33 minute mark.  Replay details below.

 

REPLAY: CLICK HERE

*Note:  There were no slides associated with this presentation

 

Hedgeye Macro


Bernanke Screws Americans (Again)

Takeaway: Look at your dollars while you still got ‘em. “In God We Trust” it says. Not un-elected central planners.

“Any society that would give up a little liberty to gain a little security will deserve neither and lose both.”

-Benjamin Franklin

 

What in the world is Ben Bernanke doing?

 

What is so frightening about what is going on right now is that this un-elected, un-accountable individual has the power to change the entire risk parameters of the economy with an un-qualified market timing opinion that spits in the face of economic data. If you didn’t know that an un-elected central planner could change the entire complexion of risk overnight, now you know.

 

Bernanke Screws Americans (Again) - bbo

 

Look, I get the whole fear-mongering, love for Ben thing. Politicians and bankers who put the country on the brink saved us from themselves in 2008 – or so they claim. Even if you believe that, that was back in 2008-2009. We’re half-way through 2013 for God’s sake.

 

The last time I saw disgraced Lehman CEO Dick Fuld, he was living large at my golf club. Meanwhile, Tim “Turbo Tax” Geithner just got paid $200,000 to speak at an #OldWall conference. And bankers who are long FICC (Fixed Income, Currencies, Commodities) not to mention Bill Gross, have been begging and pleading with Bernanke for more ultra easy money. Is this the society Ben Franklin and Thomas Jefferson had in mind? 

 

If it’s not self-evident to you by now that markets are going squirrelly on this, your internet connection must be down. Pardon the pun, but in a nutshell:

  1. American Purchasing Power (US Dollar) is getting pounded on this
  2. Gold, Silver, Oil, etc. (Bernanke Bubbles) are all ripping
  3. Treasury Yields are having their 4th down-day in a row, after rising on employment #GrowthAccelerating

So here’s the deal: Ben Bernanke is not only going to a) time the economic cycle (even though his growth forecasts have been wrong 58-73% of the time, depending on what year you use), he’s also going to b) time the market cycle.

 

That’s just great.

 

Actually, to be balanced, what he’d say he’s attempting to do (which is unprecedented by the way during a recovery) isn’t timing, per se. I think these Keynesian types who have never risk managed a market or run a business in their life call it “smoothing.”

 

I call that reckless.

 

Here’s my policy advice: longer-term, Mr. Market is already pricing in #StrongDollar and #RatesRising. So just let it go pal. Let free-market prices and economic cycles clear. Or do what you’re doing and your legacy will be that of someone who kept trying to re-flate bubbles as they were blowing up.

 

If Bernanke doesn’t take Mr. Market’s advice on this, here’s what is most likely going to happen:

  1. US Dollar Debauchery = Commodity Reflation
  2. Commodity Reflation = Consumption #GrowthSlowing

In other words, with Oil prices ripping higher above the key, long-term risk line of $108.11/barrel earlier this morning, Bernanke once again clobbers everyday Americans.  This is Washington at its finest: Congress can’t pass basic laws in areas where 90% of Americans agree; Bernanke has been operating on his own for years, but his policy has never been so out of line with the American People as it is today.  It doesn’t take a Princeton PhD to recognize that inflation at the gas pump is a massive, and instantaneous, tax hike.  Or doesn’t Bernanke remember the impact on consumers when he cut rates too early in the summer of 2008 – and triggered an oil spike to $150 a barrel?

 

Higher oil prices slow growth – prepare for that, new as of today, compliments of Bernanke.

 

This is not new territory for this conflicted monetary cat. Remember what he did with his “communication tooling” in September of 2012? He said he would print to infinity and beyond. Commodities, most notably gold, had their last hurrah on that.Then, within 2-3 months, markets were in bedlam, US Consumption growth tanked, and the USA printed a pathetic Q412 GDP number of 0.38%! Just awesome.

 

It’s especially awesome for the guy who gets paid to run Gold Bond funds. Why don’t we take rips on this volatility roller coaster over and over and over again? Bernanke is on the switch – we’ll have 3 coasters on the same track at the same time; he’s wicked good on timing!  Indeed, he creates the timing.  It must be awesome, playing God with people’s lives.

 

Speaking of God, what’s my economic strategy this morning? Prayer.

 

Seriously, what on God’s good earth (the actual God now, not the un-elected one) am I supposed to recommend you do on this? Lever yourself up with asset classes that are crashing? Fortuitously, we aren’t short anything related to Bernanke’s banker boy bonuses (FICC – Fixed Income, Currencies, Commodities). And we’re not short anything PIMCO yet either, so maybe I’ll just sell everything and take the rest of the summer off.

 

I’m getting really tired of all this un-American central planning anyway. We’ve had a great year, and there’s no way I’m letting whoever this guy thinks he is make me give it all back.

 

Americans, look at your dollars while you still got ‘em.  “In God We Trust” it says.  Not un-elected central planners.


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Initial Claims: #Steady

Takeaway: The U.S. labor market continues to roll along.

This note was originally published July 11, 2013 at 10:35 in Macro

The Data & The Divergence

 

Seasonally Adjusted Claims:  Headline seasonally-adjusted claims increased  +17K to 360K from 343k (unrevised) the prior week with the the 4-week rolling average increasing 6K WoW to 352K.

 

Non-Seasonally Adjusted Claims:  The 4-week rolling average of NSA claims, which we consider the more accurate reflection of underlying labor market trends, was down -9.8% YoY, a 30bps improvement vs -9.5% the prior week. 

 

We would highlight that claims data for the week containing the July 4th holiday presents a challenge from a seasonal adjustment perspective and complicates an attempt at discerning any incremental change in the direction of labor trends.  Additionally, autocompanies keeping plants open instead of implementing typical July production shutdowns this year (first time since 2008) further complicates a clean interpretation of this weeks data. 

 

All in, the divergence between the seasonally adjusted and non-seasonally adjusted data continues to widen with the seasonal distortion driving an optical deterioration in the reported headline number while the underlying (ie. real) labor market trend remains one of accelerating improvement.  In short, the TREND (inclusive of today’s data) in the labor market remains one of strength and, given the existent July 4th holiday and autoworker dynamics, we wouldn’t read too much into this or next week’s claims data in isolation.  

 

Initial Claims: #Steady  - cd

 

Initial Claims: #Steady  - NSA Claims 071113

 

Christian B. Drake

Senior Analyst 

 


Initial Claims: Steady with an Extra Side of Seasonality

The Data & The Divergence

 

Seasonally Adjusted Claims:  Headline seasonally-adjusted claims increased  +17K to 360K from 343k (unrevised) the prior week with the the 4-week rolling average increasing 6K WoW to 352K.

 

Non-Seasonally Adjusted Claims:  The 4-week rolling average of NSA claims, which we consider the more accurate reflection of underlying labor market trends, was down -9.8% YoY, a 30bps improvement vs -9.5% the prior week. 

 

We would highlight that claims data for the week containing the July 4th holiday presents a challenge from a seasonal adjustment perspective and complicates an attempt at discerning any incremental change in the direction of labor trends.  Additionally, autocompanies keeping plants open instead of implementing typical July production shutdowns this year (first time since 2008) further complicates a clean interpretation of this weeks data. 

 

All in, the divergence between the seasonally adjusted and non-seasonally adjusted data continues to widen with the seasonal distortion driving an optical deterioration in the reported headline number while the underlying (ie. real) labor market trend remains one of accelerating improvement.  In short, the TREND (inclusive of today’s data) in the labor market remains one of strength and, given the existent July 4th holiday and autoworker dynamics, we wouldn’t read too much into this or next week’s claims data in isolation.  

 

Initial Claims:  Steady with an Extra Side of Seasonality - SA Claims 071113

 

Initial Claims:  Steady with an Extra Side of Seasonality - NSA Claims 071113

 

Christian B. Drake

Senior Analyst 

 


BACCARAT VOLATILITY STRIKES AGAIN

Core metrics were solid in May driving 6% YoY GGR growth.  Volatile Baccarat the laggard.

 

 

On the surface, May GGR growth of “only” 6% looks disappointing since we were expecting mid-teens growth off of low hold last year.  However, the core metric of slot volume was actually strong.  Baccarat drop actually declined 13% and hold was a little lower than normal which drove the negative variance from our estimate.  We would focus on the strength of slot volume which suggests an increasingly healthier Las Vegas Strip.

 

BACCARAT VOLATILITY STRIKES AGAIN - s1

 

Baccarat drop and revenue are notoriously volatile.  Following February and March YoY growth of 100% and 39%, respectively, Baccarat drop fell 17% and 11%, respectively in April and May.  History suggests June and/or July should show marked improvement.  Typically, negative Baccarat months are followed by strong months due to “whale play” timing.  The following chart displays the YoY volatility in monthly volume but also shows that the annual volume is fairly consistent and generally up.

 

BACCARAT VOLATILITY STRIKES AGAIN - s2

 



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