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YUM's Quarter Looks Solid

China, execution and margins are all highlights and we reiterate this as a core position.
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Yum! Brands (YUM) reported earnings after the close and the call is tomorrow in the morning. Earnings beat at 87 cents a share vs. the 84 cents consensus on roughly in-line revenues of $2.72 billion.

This is the first quarter where the company has decided to break out results by concept globally and not by region, although it will continue to post the all-important China and India results separately. But there are a lot of moving parts and we want to hear what the company has to say about results on tomorrow morning's call.

The headlines are good, especially China where the company does 40% of total company operating profit and really what the stock trades on. System sales grew 17%, restaurant margins rose to 23.4% vs. 16.6% last year (and the 18-19% expectations), operating profit increased 80% (constant currency) and KFC same-store sales (where the chicken supplies hit last year) improved 11% vs. the 20% drop a year ago. Clearly the menu revamp (15 new products) that it put in place earlier this year is having an impact and margins continue to be strong, proving that the execution continues to be strong. We were also pleased to see the 8% same-store sales increase in its Pizza Hut division. It opened 123 new units in this region as well, which is a 7% y/y increase, with 5% growth in KFC units, 23% in Pizza Hut casual dining restaurants and a 24% y/y improvement in home service (delivery) growth. All of these metrics were better than expectations.

KFC system sales rose 4%, with international up 11% in emerging markets, 3% in developed markets and U.S. system sales down 4%. Same-store sales rose 3% in emerging markets and U.S. was down 3%. It opened 77 new stores with 59 in emerging markets. Operating profit rose 4% constant currency.

Other regional system sales: Asia system sales constant currency rose 6%, 11% Africa, 10% Latin America, 13% Middle East, 47% in Russia and 8% in Continental Europe. In developed markets, U.S. again fell 4%, Asia rose 3%, U.K. rose 12%, Europe up 8%.

Pizza Hut restaurant system sales were flat y/y with international up 8%, developed up 2% and U.S. down 3%. Same-store sales grew 3% in emerging markets, 1% developed and U.S. down 5%. Margins fell 4.2% on struggles in the U.S. and operating profit fell 9% constant currency. Other regional system sales rose 10% in Latin America, 12% Asia, 6% Middle East and 5% Europe. In developed markets, U.S. again fell 3%, Asia rose 2%, U.K. was up 2% and Europe up 2%.

Taco Bell U.S. same-store sales fell 1% and margins fell 2.6% on promotional activities and sales deleverage. Operating profits fell 11% constant currency. India system sales rose 21%, with 25% unit growth and a 1% same-store sales decline. India KFC unit growth rose 25%, Pizza Hut up 29%, casual rose 8% and home service increased 39%.

We'll get more details on tomorrow's call, but our general thoughts are that the China recovery is happening, execution is better, margins were well ahead and the rest of the world mostly in line. We want to hear more about U.S. and Taco Bell momentum as well as that chain's new breakfast initiatives. But overall, with easy comparisons for the rest of the year and the sales momentum building in China, we reiterate that this is a core position and keep our $90 target.

Regards,

Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUSwas long YUM.