PRICE ACTION IN QSR TELLS A STORY

We’ve been writing on the divergence between FSR and QSR of late but yesterday it was the divergence between BKC and YUM that caught my eye.  Yesterday, both YUM and BKC reported calendar 4Q09 EPS and the street’s reaction is clear in the table below. 

YUM greatly underperformed, declining 5.5% on a big uptick in volume as compared to its 30 day average.  On the other hand, BKC significantly outperformed (especially given that the S&P 500 was down 3%), closing up 2.9% also on strong volume.  Just looking at the short interest alone, the street was expecting something different, as reflected in YUM’s short interest at 2.1%, only slightly higher that MCD’s at 1%.  The BKC number, however, is a surprisingly high 11%.  Clearly, part of yesterday’s move in BKC was short covering, as the quarter was not that bad.  Investor reaction suggests that it was better than YUM’s.

PRICE ACTION IN QSR TELLS A STORY - QSR price action

While movements in the stock tell us something, the fundamentals seem to confirm it in this case.  YUM, MCD, and BKC, have all seen sharp declines in their U.S. comparable-store sales trends.  It is interesting to note that BKC’s U.S. & Canada two-year comparable-store sales trends actually improved on a sequential basis in 2FQ10, to -0.7% from -0.8% in F1Q10.  YUM’s U.S. comparable-store sales continued to decline on a one and two-year basis in 4Q09 at -8% and -3%, respectively.  This implies a 150 bp sequential decline in two year trends from 3Q09.  MCD’s two-year comparable-store sales trends also deteriorated in 4Q09 but remain positive at 2.6%, down from 3.6% two-year trends in 3Q09.

The respective management teams’ comments on recent conference calls were also informative; MCD and BKC expressed some optimism about trends in January whereas YUM implied no improvement in its U.S. QSR trends.  MCD stated that trends in January were better than in December when the impact from weather was factored out (which they estimated to be -3%).  BKC’s management labeled January a “bifurcated month” where the first two weeks were marred by bad weather but the last two weeks saw traffic bounce “back to positive again” in the U.S.  YUM did not sing to the same tune on their conference call, stating that they would not comment on sales trends in the middle of the quarter in the absence of “a very significant change in results”.   YUM emphasized that Pizza Hut has seen a “dramatic” improvement following the recent focus on value but did not give any update on trends in KFC and Taco Bell, which implies that we won’t see much of a pickup in underlying trends in the first quarter of 2010 from the 4Q09 trends of -8% and -5%, respectively (though comparisons do get easier).

YUM’s international trends have been a cause for concern.  On a sequential basis, for 4Q09, two-year comparable sales trends deteriorated for YUM’s China and International divisions.  Again, based on management’s comments, we are not expecting much of an improvement in the first quarter.  While the respective companies’ reporting methods do not allow for apples-to-apples comparisons of international trends, MCD’s APMEA trends have also shown softness, reflecting weakness in China, but two year trends improved in the fourth quarter from the relatively softer level in 3Q09.  MCD’s two year trends in Europe slowed slightly in 4Q09, but remain above 6%.  BKC’s EMEA/APAC and Latin America trends improved during the quarter on a two-year comparable-store sales basis.

Earlier this week I suggested that YUM’s aggressive capital spending in China over the last four years is starting to have an impact on the sustainability of the current growth rate.  The company went to great lengths on its earnings call to dispel this notion.  Time will tell.