YUM: BUY THE CONTROVERSY

We continue to be buyers of the negative headlines in China.

 

 

July Sales Disappoint...

 

YUM is trading down following yesterday’s release of July comps for the China Division.  While it is important to see the China Division return to positive same-store sales, we believe how they get there is more important than when.  YUM’s management continues to warn investors that the Chinese business will be spotty, but expects same-store to turn positive in 4Q.  At this point, we believe management may be regretting guiding to a 4Q13 recovery in China comparable sales.

 

YUM estimates that same-store sales in July were down -13% in the China Division versus expectations of a -4% decline (StreetAccount), with KFC down -16% and Pizza Hut up +3%.  We were secretly hoping for the company to come off the long standing expectation of a 4Q13 recovery to positive same-store sales.  After two consecutive months of sequential improvements (in May and June), expectations have risen for a continued sequential improvement in comparable sales trends moving forward.  The difficulty in projecting these trends comes in the face of conflicting macro data points in China, but, the continued easing of Avian flu issues and very easy comparisons will certainly benefit the reported results for the balance of the year.

 

Attempting to parse the macro environment in China and its implied impact is a significant challenge, but the underlying tone of the more discretionary +3% same-store sales at Pizza Hut certainly raises a red flag.  Perhaps even more so than the KFC numbers, as it is obvious the brand is still seeing the lingering effects of December poultry issues and other supplier concerns.

 

 

Buy the Dip

 

With the reality of a soft top-line now common knowledge, we believe the real driver of sentiment moving forward will be the slope of the line in the margins of the China Division.  China margins held up better than expected in 1H13, despite significant declines in traffic and mix, as YUM benefitted from lower food costs and improved labor productivity.  We expect margins in 2H13 and 2014 to improve concurrently with an improvement in same-store sales.  The company has previously acknowledged that they need mid-single digit same-store sales growth in China in order to fully offset inflation, and we believe a continued internal focus on margin management will lead to better than expected earnings in 4Q13 and 2014.

 

Buying into negative news is never an easy task, but YUM’s management team has proven over time that this is the right course of action to take.

 

 

YUM: BUY THE CONTROVERSY - YUM SEQ

 

 

 

Howard Penney

Managing Director

 


Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more