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YUM | HOLDING ONTO THE PAST

YUM is on the Hedgeye Restaurants Best Ideas list as a LONG.

 

The overall performance of Yum! Brands continues to be overshadowed by the poor results from the China segment. Yesterday, YUM released 3Q15 earnings that missed estimates on the top and bottom-line, mainly due to China. Company revenues were $3.43bn, short of consensus estimates of $3.67bn. Same-Store Sales (SSS) were strong in all segments except for China and India. China posted SSS of +2%, well short of consensus estimates of +9.6%, while India posted -18% SSS versus consensus at -6%. KFC on the other hand continued to perform well, posting +3% SSS versus estimates of +2.6%, Pizza Hut continued their flat trajectory with +1% comps versus estimates of +0.5%, and lastly, Taco Bell, put up a +4% comp against estimates of +3.9%. Even with the positive performance ex-China, YUM missed on the bottom-line, reporting Q3 FY15 EPS of $1.00 versus consensus estimates of $1.06.

 

THE NEW FULL YEAR GUIDANCE

With the continued pressure in the China business, management has decided to lower guidance, they now expect full year 2015 EPS growth to be in the low single-digit positive range. Versus guidance delivered during the 2Q15 call, of at least 10% EPS growth.

 

YUM | HOLDING ONTO THE PAST - chart 1

YUM | HOLDING ONTO THE PAST - chart 2

YUM | HOLDING ONTO THE PAST - chart 3

YUM | HOLDING ONTO THE PAST - chart 4

 

I asked Greg Creed at the analyst meeting last November what he wanted his legacy to be as CEO of YUM.  His answer: “to return YUM to the 10% EPS growth model of the past.”  While that may sound good given the track record of his predecessor, the world has changed and so should YUM.  Holding onto the past is a waste of energy, and serves no purpose in creating a new future for YUM.  It’s time for CEO, Greg Creed, to solidify his legacy as CEO of YUM and forge a new path for YUM that will better serve shareholders.

 

More to the point, YUM’s CHINA growth model has changed and will never look like it did in the past.  As opposed to 5 or 10 years ago, China represents a nasty mix for YUM – a business unit that is under significant pressure and it makes up a significant part of YUM’s financial performance.

 

The Board must do something to evolve the business model and reduce its exposure to China in a meaningful way.  The board can de-risk the business by selling off company-owned stores in China and returning the company to a GLOBAL QSR asset light model.

 

YUM is a great company with three great global brands.  The margin structure, balance sheet and cash flow of the company are envy to many global companies.  This is highlighted by the dividend raised by 12%, slightly better than what I thought they would have done.  The strength of the company can also be seen in the performance of KFC and Taco Bell, both concepts posted strong results, despite potential headwinds (KFC in emerging markets and MCD slowing Taco Bells performance). 

 

Despite these having significant number of positive attributes, the assets in China are now a liability, and the stock will trade that way until a new path forward is determined.  The clear evidence of this is how the stock traded today, down roughly 17%.  The message to the company is clear - shareholders want a new way forward. 

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD

Takeaway: With renewed economic worries after the Fed delayed its rate hike, investors pulled funds from both equity and bonds while shoring up cash.

This note was originally published October 01, 2015 at 07:47 in Financials. If you'd like more info on our institutional research email sales@hedgeye.com.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending September 23rd, investors made net withdrawals from both total equity mutual funds and ETFs, which lost -$1.5 billion, and total bond mutual funds and ETFs, which lost -$778 million. Meanwhile, market participants shored up +$14 billion in money market funds during the week. This defensive reallocation came as the Fed's decision not to raise rates sparked fresh worries over the state of the economy and uncertainty about central bank policy going forward. One trend that has been consistent recently is this build of cash on the sidelines. Total money funds, according to ICI, has amassed a +$45 billion balance quarter-to-date after draw downs of -$18 billion in 2Q and -$92 billion in 1Q15. We continue to favor money fund manager Federated Investor (FII) as a Long position (see FII report) with emerging conservatism by investors and avoiding or Shorting the equity managers, Janus Capital and T. Rowe Price (See JNS and TROW reports).


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - zzzzz fund flowz


In the most recent 5-day period ending September 23rd, total equity mutual funds put up net inflows of +$2.3 billion, outpacing the year-to-date weekly average outflow of -$229 million and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$2.2 billion and domestic stock fund contributions of +$87 million. International equity funds have had positive flows in 46 of the last 52 weeks while domestic equity funds have had only 11 weeks of positive flows over the same time period.


Fixed income mutual funds put up net outflows of -$1.8 billion, trailing the year-to-date weekly average inflow of +$354 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds contributions of +$628 million and taxable bond funds withdrawals of -$2.4 billion.


Equity ETFs had net redemptions of -$3.9 billion, trailing the year-to-date weekly average inflow of +$1.8 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$973 million, trailing the year-to-date weekly average inflow of +$1.1 billion and the 2014 average inflow of +$1.0 billion.


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI2


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI3


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI4


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI5


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI12


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI13


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI14


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI15


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI7


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors pulled -$7.5 billion or -4% from the broad-market SPY last week as the Fed's decision not to raise rates sparked fresh fears over the state of the economy. Meanwhile, investors sought the safety of treasury bonds, contributing +5% or +$303 million to the long treasury TLT ETF.


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI17


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$742 million spread for the week (-$1.5 billion of total equity outflow net of the -$778 million outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.5 billion (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$18.8 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI10



Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:


ICI Fund Flow Survey | Cash is King; +$45 BB Build in Money Markets QTD - ICI11 



Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 


Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com







Here’s Why Industrials Are Up (And Why That May Be a Bearish Omen) | $XLI

In this brief excerpt from RTA Live earlier this week, Hedgeye CEO Keith McCullough weighs in on activist investor Nelson Peltz’s move on General Electric (GE) and why that may spell trouble ahead.

 

Subscribe to Real-Time Alerts today for access to this and all other episodes. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.

 


Early Look

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P: Dumb or Defeated? (Ticketfly)

Takeaway: Spending +60% of its cash to acquire an ancillary business ahead of a potentially crippling Web IV decision is a very telling statement.

KEY POINTS

  1. BRANCHING INTO TICKETING: P is acquiring Ticketfly for $450M, split equally between cash and stock.  Ticketfly generated $55M in 2014 revenue, and $35M in 1H15 revenue.  P didn't provide any info regarding Ticketfly's margin profile, but it's not likely that P will recoup the $225M cash acquisition price in Ticketfly cashflow anytime soon.  Note that this is a particularly aggressive move for a company with only $372M in cash on its balance sheet.  If P wanted exposure to ticketing, it could have done so through any number of partner agreements.  
  2. DUMB OR DEFEATED? Remember that P doesn't generate any material cash flow as it is, so spending over 60% of its remaining cash to acquire a new business ahead of a potentially crippling Web IV decision is a very telling statement either way.  P is either overconfident in the Web IV outcome to the point where it can start depleting its cash reserves, or it is getting ready to blow up its model ahead of an adverse outcome, and needs another story to pitch the street.  Either way P's financial flexibility will be considerably hampered after the close of the acquisition, so P will have even less wiggle room to absorb a rate increase.  And for those of you who think that can't happen, please read the note below. 

 

P: It's All About the Benchmarks (Web IV)

10/02/15 12:22 PM EDT
[click here]

  

Let us know if you have any questions or would like to discuss in more detail.

 

Hesham Shaaban, CFA


@HedgeyeInternet  


Retail Callouts (10/7): NKE, UA, RL, KSS, Athletic Retail Bankruptcy

Takeaway: Pockets of strength in China (NKE/UA/YUM). RL - $295 wearable tech. City Sports files for chapter 11. KSS Y2Y 1yr Anniversary.

YUM - Yum Brands cutting outlook after disappointing China results, noting the company is experiencing unexpected headwinds.

(http://www.wsj.com/articles/yum-brands-cuts-outlook-on-china-woes-1444164658)

We all know that this company has been the bellweather US Consumer name in China for well over a decade. Perhaps it still is. But we should note that just two weeks ago Nike printed 30% revenue growth in China, and 51% growth in income. In addition, UA's Kevin Plank was on the financial media this morning talking about the company's new retail stores in China (on the heels of his Pan-Asian Brand Tour with Steph Curry). This is not a NKE/UA vs YUM thing. But it certainly shows how pockets of strength can exist when the consumer appetite (no pun intended) is there.

 

RL - Ralph is launching it's POLOTECH Shirt -- basically a Smart Shirt that it says is the next generation of wearable technology.

(http://tinyurl.com/plolsrn)

We give RL props on this one. The company has really taken RLX from a low-end department store brand into something much better and consistent with the broader brand statement.  On the flip side, this shirt cost $295. Yes $295. For that amount of money, you can buy a FitBit, an UnderArmour Compression shirt, a pair of training sneakers, and a six pack of 5-Hour Energy shots. On top of that, RL is going to have to compete with everyone from Apple to Garmin, to UnderArmour, and Nike on the back-end user experience/community.

Retail Callouts (10/7): NKE, UA, RL, KSS, Athletic Retail Bankruptcy - 10 7 2015 chart1

 

City Sports in Chapter 11, Might Liquidate

(http://wwd.com/retail-news/financial/city-sports-chapter-11-might-liquidate-10254942/)

This City Sports announcement isn't surprising. This announcement coupled with the Sports Authority default rumors which were circling in the early part of the year come at an interesting time with the 'athleisure' space ripping the way it has over the past several years.

 

City Sports is a relatively small player in the athletic space with annual revenues just south of $50mm. It operates in high rent MSA's with relatively low asset turns and weak margins. Average sales per store is just $1.73mm. By comparison, a suburban retailer like Big 5 has similar sized stores but, is churning out $2.23mm per store. 

 

City Sports cited 'a competitive market for athletic apparel' for its profitability declines, which began in earnest in August of 2014. No question that City Sports core market is becoming increasingly more difficult as the LULU and LULU imitators build out capacity in key trade areas like NYC, Boston, DC, etc. But our sense is that it’s the brands within the 4-walls that are really putting the screws to City Sports with direct/e-commerce growth in excess of 40%.

 

KSS - 1 Year Anniversary of nationwide Yes2You rollout.

Prior to the nationwide rollout the program had 10mm members in its beta test. Within a month of the launch that number was up to 15mm, by years end it was 25mm, and in the most recent quarter that number was in excess of 30mm. The company had to launch its Y2Y rewards program because it needed to solve 2 of its biggest problems a) brick and mortar traffic levels and b) its inability to attract new customers. It's credit portfolio is tapped in the sense that its current partner CapOne won't go any lower on the FICO ladder, by that we mean KSS extended credit terms to nearly all credit worthy customers who wanted a card as it took credit sales as % of total sales from 50% to 60% from 2011-2014. The problem is that the tender agnostic Y2Y rewards program puts credit income (25% of EBIT) at risk now that customers can go into a store and pay with an Amex, Visa, etc. and get double points. That plus the fact that KSS has reached a pivotal point in its maturation cycle where it has already captured 75%-80% of all customers that could potentially shop in a Kohl’s store makes this an underappreciated risk. For a full rundown on our thesis see our most recent KSS Black Book: Putting Credit To The Test (Link CLICK HERE)

Retail Callouts (10/7): NKE, UA, RL, KSS, Athletic Retail Bankruptcy - 10 7 2015 chart2

 

NKE - Bob Hurley to Retire as CEO of Hurley, will now "focus on building and cultivating the community and extending Nike’s relationships with elite athletes."

(http://wwd.com/business-news/human-resources/bob-hurley-retire-ceo-nike-surf-10256537/)

 

DLTH - Duluth Trading Files S-1

(http://wwd.com/business-news/financial/duluth-trading-ipo-10256452/>

 

OXM - Terry R. Pillow retiring as CEO of Tommy Bahama Group on January 30, 2016

(http://www.chainstoreage.com/article/change-leadership-coming-tommy-bahama)

 


Purchase Demand Is Good, But Not That Good | TRID Juices The #s

Takeaway: This week's Mortgage moonshot will prove short-lived as TRID pullforward will give way to TRID vaccuum, but the organic trend remains solid.

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 Demand Is Good, But Not That Good | TRID Juices The #s - Compendium 100715

 

Today's Focus: MBA Mortgage Applications

 

Purchase Applications rose a moonshot +27.4% week-over-week while accelerating to +49% YoY!  Volume Trends are good, but not that good. 

 

Strength in the latest week can be attributed to a pre-TRID implementation pull-forward in demand. 

 

Redux: What’s TRID Again?  As a reminder, TRID (TILA-RESPA INTEGRATED DISCLOSURE) replaces the current federal disclosure forms with two new forms (Loan Estimate & Closing Disclosure) with the goal of reducing paperwork, simplifying & clarifying language and improving consumer comprehension of loan terms and requirements.  While there is general agreement that, once implemented, the changes will be broadly positive there has been considerable stakeholder angst over the collective ability to effectively integrate and comply with the required changes given the breadth of adjustment to both  internal operations and technology platforms mandated under the Act.  

 

SPEED BUMP or SPIKE STRIP?  The Y2K experience is an apt analog as no one really knows if systems/processes are truly compliant until the switch gets flipped. There is a good chance for a modest speedbump in reported activity following initial implementation (i.e. closing activity lagged 6-8 wks from the Oct 3rd implementation date), but there also exists the possibility for lagged choppiness alongside the seasonal spring pick-up in 2016 – particularly if lenders misestimate staffing levels needed to adequately manage prevailing volume flow.  

 

Despite the integration uncertainty, the current setup probably represents a best-case implementation scenario as the October implementation date with the subsequent enforcement grace period will allow stakeholders to integrate the changes during a seasonally slow period while providing nearly 6 months of ‘live prep’ ahead of the 2016 spring selling season

 

Enforcement Grace Period:  Notably, its expected that the House will consider the Homebuyer Assistance Act this afternoon which would create a formal and defined grace period lasting through the end of the year.  Previously, the CFPB indicated they would provide an enforcement grace period following the Oct. 3rd implementation, but the bureau fell short of providing discrete terms or a defined duration for that grace period.  We reviewed the TRID regulatory issue in our 2Q/3Q themes decks and our summary review slide is below.

 

Short-Term Positive?  While TRID implementation may perpetuate volatility in the data over the intermediate-term its unlikely to catalyze a permanent shift in the demand curve and may, in fact, serve to juice both the New and Pending Home Sales figures for September as the bolus of pre-TRID demand flows through the reported volume figures.  

 

Other Quick Thoughts:  While its likely we give back all of this weeks rise in purchase demand in the coming weeks, the trend has been steady and well above the pace observed in 2H in recent years.  The lower volatility and higher level of demand reflects ongoing organic improvement and the slow march to market normalization with conventional borrowers increasingly taking back share.  Further, rates breached 4.0% to the downside for the first time since May in the latest week and, at current levels, remain a tailwind to both affordability and HPI.  

 

 

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - Purchase YoY  

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - Purchase 2013v14v15

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - Purchase   Refi YoY

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - Purchase index   YoY Qtrly

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - Purchase LT

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - 30Y FRM

 

Purchase Demand Is Good, But Not That Good | TRID Juices The #s - TRID Review

 

 

 

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

 


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 80.64%
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