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.
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.
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.
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.