Good Eats: YUM Brands Posts Solid 4th Quarter

The world’s largest restaurant company in terms of system restaurants with nearly 36,000 restaurants in over 110 countries and territories, Louisville, Kentucky based Yum! Brands, Inc. (YUM) announced earnings for the fourth quarter and full-year 2008 after the bell on Tuesday.  With some initial selling pressure in after-hours trading, shares traded mostly sideways on another down day for the Dow Industrials (^DJI) Wednesday.  Investors sent shares downward after digesting the slide in profits from the fourth quarter in 2007 as net income was down 12 percent to $204 million, or $0.43 cents per share.  Excluding special items, profits of $0.46 cents per share beat Reuters Estimates of $0.45 cents a share.  Total revenue was up during the quarter to $3.38 billion from $3.26 billion in 2007, and for the full-year 2008 EPS was up over 14% to $1.91 per share.

Company-wide, YUM maintained strong worldwide operating profit growth of 17%, excluding special items, driven by 18% growth in the China Division and 7% growth in the U.S during the last quarter.  Growth was obviously down from the exorbitant numbers in previous quarters as expansion overseas boomed and the U.S. was still operating without the stigma of an official recession, but reality set in towards the end of the year and numbers moderated slightly.  Overall company growth remained solid in the face of the global slowdown as the company opened a record 1,495 new restaurants outside the U.S., generated worldwide same-store-sales growth of 3%, and grew worldwide operating profit by 8%.

A Closer Look

With four of their restaurant brands - KFC, Pizza Hut, Taco Bell and Long John Silver’s - global leaders in their respective food categories, the company operates in three distinct business divisions:  The United States, China, and YUM! Restaurants International.

The lack of consumer spending in the U.S. was evident in the company’s latest financial report as same-store growth fell to only 2% percent during the quarter.  Operating income was up impressively 7% percent from the same period in 2007, but for the full year down around -6% percent.  Numbers were deceivingly impressive over the last quarter as a result of franchising gains, but losses of over $100 million dollars over the course of the year due to commodity inflation tempered earnings.  YUM plans on continuing to franchise their stores with 500 more planned this year in hopes of reducing company ownership to 10% percent or less by 2010.

China and Beyond

As the U.S. markets continue to flounder amid the financial meltdown, China and the rest of the world have weathered the deepening storm seemingly with better fortune, at least from YUM Brand’s point of view.  Their China division includes all of mainland China as well as Thailand (KFC and Pizza Hut), and Taiwan (KFC).  Explosive growth continued on the mainland as a record number of new store were opened over the quarter and the company was able achieve fourth quarter operating profit growth of 18% percent, albeit lagging far below the 44% percent rate of a year ago.  The bottom line was positive, but hurt significantly by continued high commodity inflation and the ever increasing costs of labor in China.  Foreign currency conversion did provide relief as the Yuan has appreciated against the Dollar over the earnings period.

With respect to the rest of the world outside the United States and China, YRI kept moving forward as they opened a record 924 new restaurants in more than 75 countries with strong system-sales growth of 9% for the quarter.  Higher growth numbers were negated by an unfavorable currency exchange, cutting off 8% percentage points for the quarter.

What’s Next?

YUM Brand’s Chairman and CEO David C. Novak summed it up well in saying, “As we go into 2009 we continue to target at least 10% growth in EPS, while recognizing that in particular the U.S. consumer is under extreme financial pressure, making sales growth more difficult to achieve than in recent times… Nevertheless, we remain confident that the power of our global portfolio will enable us to once again perform relatively well in what promises to be a challenging environment.”

Top executives have said that they plan on the first quarter being significantly impacted by commodity inflation and continued unfavorable currency exchanges in certain markets.  They do feel however that once they make it through the beginning of 2009, the inflation should moderate and they feel well-positioned to make a strong finish at the end of the year.  This was echoed with very positive guidance for the full-year as they repeated their forecast for per-share earnings growth of at least 10% percent in 2009 and said it sees full-year earnings of $2.10 per share, excluding items.  That is $0.02 cents above analysts’ average forecast of $2.08 for 2009.

YUM continues to outperform both the Dow and S&P 500 (^GSPC) over the last six months and will be looking to capitalize on any turn around in consumer food spending.  You should not be looking for fireworks when you invest in this company, and patience will be rewarded as this company builds on their already dynamic reputation and global reach.  With such high brand recognition and new stores shooting up across the world at staggering rates, even with fewer than record store openings I feel YUM will be a safe investment for the future.  Now is probably not the time for any serious consideration for a long position in any stocks, but as the economy continues to shake itself out best of breed companies such as YUM Brands Inc. will make their presence felt in the end.

Disclosure: None

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