For investors who follow Yum Brands (YUM), the title may sound like a broken record; its pretty much the same thing every quarter. Amidst fresh warnings from an analyst at Citi (C) regarding softer same store sales performance, Yum announced third quarter results (PR). Analysts had expected the company to report flat earnings of $.58 per share, but the results easily topped that view coming in at $.70 ex-items. This earnings beat should come as no surprise as they have beaten the consensus view each quarter for more than three years! Furthermore, the company felt confident enough to raise guidance for EPS growth for fiscal 2009 to 12%, lifting the guidance to $2.14 from $2.10. Yum’s management reiterated its earnings growth target of 10% for fiscal 2010, an on-going goal that the company has meet or exceeded for the past eight years.
This quarter’s earnings beat was driven by particularly strong operating earnings growth from China +32% and the U.S. +18%. Same store sales results in the U.S. were even worse than the Citi analysts’ prediction, declining 6% and plunging 13% for the Pizza Hut division. However, lower food costs and reducing G&A expenses more than made up for the declines. The company said that they expect to save about $60 million in G&A expense for the year.
Last week, YUM management announced that they would increasing the quarterly dividend by 11%. This is the fifth annual increase for the company, dating back to the inception of the dividend in 2004, and in that time they have returned over $1 billion to their shareholders through quarterly dividends. In addition, the company is increasing their share buy-back program by $300 million. According to the press release, the company has returned $6 billion in ten years of share repurchase programs. Clearly, Yum has made a commitment to return a large portion of free cash flow to the shareholders.
The recent shareholder friendly uses of capital are not signaling that the company is tamping down efforts for growth. YUM says that it is on track to open 1400 new restaurants overseas this year, and China is now Yum’s second largest market. System-wide sales in China grew 11%, but same store sales were a little disappointing as they stayed flat. Sales growth in the emerging markets will continue to be a metric that analysts watch very closely, and as of right now they were decent with international sales rising 4%. This worldwide expansion effort should benefit from the weakness of the dollar, and without currency effects worldwide sales would have declined 4%.
Yum Brands did pretty much what they have been known to do in recent years. They beat analysts projections for profit, even though top line sales left something to be desired. Aggressive cost cutting and assistance from lower commodity costs as well as a weakening dollar all played a big part in Yum’s profits this quarter. However, the company’s commitment to expanding their global footprint remains at the forefront of investors minds. We are maintaining our Fairly Valued stance on shares after the latest report, and we have a rationally expected price of $38.
