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YUM | Delivered a Mixed Bag of Results

China is turning around and showing sequential improvement while KFC and Taco Bell continue to post very impressive numbers.  YUM remains on the Hedgeye Restaurants Best Ideas list as a LONG, we are very focused on the progress China is making as well as the struggles Pizza Hut is having.

 

Yesterday after the close, YUM reported adjusted Q2 EPS of $0.69 versus consensus of $0.64, representing a 5.5% decline versus last year. In the release, management just as in Q1 reiterated its full-year EPS growth goal of “at least 10%,” with the street currently projecting 12.9% growth for the year.

 

Management continues to stand behind all of their brands with a disruptive innovation plan and strong value for the customer. We continue to disagree with their affection for the U.S. Pizza Hut business, the division reported another flat quarter in Q2 pulling the two year trend lower. Management stated during the call a slew of problem areas for the business starting with tired assets, weak ecommerce and customer experience, while still trying to figure out their value play. Looking at the problems, the U.S. based Pizza Hut business could be a CAPEX black hole while management figures out how to fix it or realizes it needs to be sold.

 

With activist stockholders now in the mix, they will not settle for poor performance long, and we anticipate their voice getting louder in the near future.

 

Below, we provide a brief update on each operating division.

 

China same-store sales declined -10% in the quarter, coming in below consensus estimates of -8.4%. Restaurant level margins of 14.6% surpassed consensus estimates by 115 basis points. KFC and Pizza Hut same-store sales declined -12% and -4%, respectively, reflecting continued recovery from adverse supplier publicity in July 2014. Despite the top line miss, the productivity initiatives that the management team has undertaken have been beneficial to the bottom line. In 2H15 as sales trends accelerate, expectations are for significant flow through and further margin improvement.

 

YUM | Delivered a Mixed Bag of Results - YUM CHART 1 

 

 

Taco Bell same-store sales increased 6%, 240 basis points above consensus estimates of 3.6%. Restaurant level margins of 23.0% increased 530 basis points YoY and beat consensus estimates of 19.84% by 316 basis points. Breakfast (launched in 2Q14) continues to be a key part of this growth story, but management stated that through innovation and value they are growing in all dayparts. Taco Bell remains a growth story as they are currently largely located in the U.S. with minor operations in Latin America and Canada, which by the way are performing great as well. International unit growth is a key priority for management on this business.

 

YUM | Delivered a Mixed Bag of Results - YUM CHART 2 

 

KFC same-store sales increased 3%, slightly below consensus of 3.1%. Restaurant level margins of 15.3% surpassed estimates of 13.99% by 131 basis points. Continues to be a strong brand internationally, the team opened 122 restaurants in the quarter, including 89 (73%) units in emerging markets.

 

YUM | Delivered a Mixed Bag of Results - YUM CHART 3 

 

Pizza Hut same-store sales were once again flat, coming in below consensus estimates of 1.4%. Restaurant level margins of 9.9% grew 220 basis points YoY and exceed the streets estimates by 163 basis points. The business is clearly still struggling, especially in the U.S., where they are having trouble attracting new customers. Management has stated the brand is in need of capital to improve the asset base and customer interaction. Internationally, assets are in much better condition and so is the business performance. The division opened 66 new international restaurants in 33 different countries, including 33 units in emerging markets.

 

YUM | Delivered a Mixed Bag of Results - YUM CHART 4 

 

YUM | Delivered a Mixed Bag of Results - YUM CHART 5

 


Cartoon of the Day: China Dragon?

Cartoon of the Day: China Dragon? - China cartoon 07.15.2015

 

"So, they nailed another perfect 7.0 in China for said GDP in Q2 (same made-up # in Q1, not 6.87, or 7.11 – 7.0%) ... but the locals didn’t believe that, selling the Shanghai Composite Casino down for a -3% day (-4.2% in the last 2 days and -24.8% in the last month)" - Hedgeye CEO Keith McCullough earlier this morning

 

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Is Chanos Right On China Being One of the Greatest Short-Selling Opportunities In History?

 

After Jim Chanos' remark that there is still more pain to come in China and a tidy 7.0% GDP print, Hedgeye Director of Research Daryl Jones weighs the pros and cons of being short Chinese equity markets on The Macro Show.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

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Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

Purchase Apps | Holiday Noise

Takeaway: Q3 Housing data is off to an ambiguous start thanks to Holiday volatility. We'll have a better sense for how things are trending next week.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

Purchase Apps | Holiday Noise - Compendium 071515

 

Today’s Focus:  MBA Mortgage Applications

Data volatility is notoriously prevalent around holidays and seasonal adjustments are notoriously poor at fully resolving the peri-holiday choppiness in activity.  Superficially, the last two weeks of Purchase Application data appear to support that notoriety. 

 

After rising +6.6% in the week ending July 3rd, Purchase Demand in the latest week declined -7.5%.   We’re inclined to simply call it a wash and wait for next weeks data before attempting to discern any underlying shift in demand to start 3Q. 

 

The Data:  Purchase activity declined -7.5% in the latest week, taking the index back below the 200-level to 196.4.  From a rate-of-change perspective, however, the data was more sanguine as growth actually accelerated +10bps sequentially to +17.0% YoY.  Refinance activity, meanwhile, rose +3.7% with rates on the 30Y FRM contract steady for a second week at 4.23%.   Rates remain -2.3% lower than the corresponding period last year with the current rate of 4.23% comparing to the full year average of 4.35% and the 1H15 average of 3.97%. 

 

In short, the high-frequency Purchase Demand data remains good on an absolute basis and very good on a rate of change basis but the holiday convolutes a clean reading of the trend to start 3Q.  Hurry Up and wait.  

 

 

Purchase Apps | Holiday Noise - Purchase   Refi YoY  

 

Purchase Apps | Holiday Noise - Purchase Applications LT 

 

Purchase Apps | Holiday Noise - Purchase 2013v14v15 

 

Purchase Apps | Holiday Noise - Purchase Index   YoY Qtrly 

 

Purchase Apps | Holiday Noise - Purchase YoY  

 

Purchase Apps | Holiday Noise - 30Y FRM 

 

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


Yes, Growth Is Slowing

Takeaway: Compares throughout the rest of the summer, and fall, AND holiday, don't get any better.

Editor's Note: The excerpt below is from a research note written yesterday by our Retail Sector Head Brian McGough. If you'd like to learn more about how Hedgeye can help you click here.

*  *  *  *  *

Yes, Growth Is Slowing - z snail

Retail Sales Slowing

 

Expectations were definitely out of whack headed into this Retail Sales print given the big headline miss.

 

Two things:

 

  1. The level of sales growth relative to last year is absolutely positively decelerating. In January we saw 5.4% growth, and we've steadily decelerated to 1.9% in the following five months. 
  2. We're scratching our heads as to why this is a big 'surprise'. Commentary from large and small retailers alike have supported a decelerating growth rate. In addition, while the 2-year run rate in the real discretionary categories is below what we witnessed in 2H14 (4%) it is consistent with what we've seen over the past 3-months. 

The bottom line? Yes, growth is slowing. Yes, we expected it. Compares throughout the rest of the summer, and fall, AND holiday, don't get any better.

 

Yes, Growth Is Slowing - z mcgough retail


INVITE (HOLX) | BEST IDEA UPDATE CALL... ROOM TO RUN, EVEN FROM "UP HERE"

Takeaway: We're hosting an update call Wendesday July 22. The path to $50... and higher.

INVITE (HOLX) | BEST IDEA UPDATE CALL... ROOM TO RUN, EVEN FROM "UP HERE" - 2015 07 15 Breast Health Accelerates

HOLX UPDATE CALL wednesday july 22

On Wednesday July 22 we are hosting a conference call and live studio event for institutional subscribers to review our outlook for HOLX.  We first added HOLX to the Hedgeye Best Idea List as a long in April 2014 when the stock was in the low $20s.  Since then, our original thesis has played out, with the stock doubling as we predicted, and many of the fundamental and sentiment drivers maturing on schedule.   We will review the path into the $50s on our call next week ahead of HOLX earnings report July 29.

 

CLICK HERE FOR ORIGINAL BEST IDEA NOTE

 

CLICK HERE FOR ORGINAL BEST IDEA PRESENTATION 

ROOM TO RUN, EVEN FROM HERE

The sensitivity table below makes use of our s-curve forecast model that is based on MQSA and our monthly count of 3D facilities published in the Tomo Tracker.  As we've published recently, consensus Breast Health revenue numbers are low compared to our model.  However, despite the large gap between our estimate and consensus, we view our estimates as conservative.  

 

As the table shows, if we accelerate the pace of adoption by even very small increments, the impact to revenue, EPS and valuation is substantial.

INVITE (HOLX) | BEST IDEA UPDATE CALL... ROOM TO RUN, EVEN FROM "UP HERE" - holx sensistivity

3d Tomo tracker 

Below are the monthly 3D Tomo Tracker update charts through June.   Our data on the facility counts with a 3D Tomo system allow us to update and forecast 3D adoption.  Our s-curve model currently has a variance of 0.13%  between predicted penetration and actual facility adoption between September 2012 and June 2015.  As seen in the revenue build table below, we believe Breast Health will drive substantial upside in the coming quarters beginning F3Q15 (Jun).

INVITE (HOLX) | BEST IDEA UPDATE CALL... ROOM TO RUN, EVEN FROM "UP HERE" - HOLX s curve June15

INVITE (HOLX) | BEST IDEA UPDATE CALL... ROOM TO RUN, EVEN FROM "UP HERE" - HOLX 3D monthly June15

INVITE (HOLX) | BEST IDEA UPDATE CALL... ROOM TO RUN, EVEN FROM "UP HERE" - holx sensistivity

 

Please call or email with questions.

 

Thomas Tobin
Managing Director 

@HedgeyeHC

 

Andrew Freedman

Analyst

@HedgeyeHIT 

 


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