YUM reported November comps for its China Division earlier this week.  Total China comps (+1%) beat expectations (-1%) as Pizza Hut comps (+7) and KFC comps (+0%) showed strength during the month.  KFC comps were largely driven by a half-price bucket promotion during the first 10 days of the month which saw comps run +16%.  Even though this implies comps were down -8% for the rest of the month, this successful promotion indicates that Chinese consumers are warming back up to chicken. 


Overall, total comps improved 600 bps sequentially from October and turned positive for the first time since February.  As we mentioned in our last note, we expect China comps to be positive in December and throughout 2014, as the business stabilizes, sales momentum builds, and YUM rolls over easy comparisons from a year ago.  On the domestic front, management announced a 2014 national breakfast launch at Taco Bell which is expected to drive incremental sales in the U.S.


While today’s analyst meeting didn’t necessarily provide us with any new news, it did give us further confidence in our bull case.  Management expects at least 20% EPS growth in 2014, approximately 40% operating profit growth in China, and impressive unit growth of 1,850 new international restaurants, including 700 new units in China, and 150 new units in India. Management believes that the fair value of its stock is $90 based on a SOTP and DCF analysis.  We believe YUM has tremendous opportunities for potential growth through various channels, particularly in China where it is well positioned long-term to take advantage of a growing consumer class that is expected to double from 300mm+ in 2012 to 600mm+ by 2020.


YUM is our favorite LONG in the big cap QSR landscape one of the best positioned stocks heading into 2014.  The main risk to our thesis continues to be persistent volatility in China, although we believe this is largely played out.  In our view, easy comparisons, new unit growth, and positive earnings momentum will lead to margin and multiple expansion over the next several quarters.  






YUM ANALYST DAY - 12 4 2013 1 36 13 PM




Howard Penney

Managing Director


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