Why Did Yum! Brands’ Revenue Decline in 2Q16?
In 2Q16, Yum! Brands earned 84.9% of its revenue from company-owned restaurants and 15.1% from franchised restaurants.
July 15 2016, Published 9:46 a.m. ET
Revenue sources
Yum! Brands (YUM) earns revenue from company-owned restaurants and franchised restaurants. In 2Q16, the company earned 84.9% of its revenue from company-owned restaurants and 15.1% from franchised restaurants.
2Q16 performance
Yum! Brands reported an overall revenue of $3.0 billion in 2Q16, which represents a decline of 3.1% from $3.1 billion in 2Q15. YUM has classified its operations into four divisions: China, KFC, Pizza Hut, and Taco Bell.
China division
In 2Q16, the China division generated 52.8% of YUM’s total revenue. Compared to 1Q15, its revenue declined by 2.9% from $1.64 billion to $1.59 billion. The decline in revenue was due to a lower number of company-owned restaurants due to refranchising.
The gains from positive same-store sales growth at KFC were offset by negative same-store sales growth at Pizza Hut restaurants. However, some of the declines were offset by an increase in the total number of units. In 2Q16, the division operated 393 more restaurants compared to 2Q15.
Global brands
The KFC division posted revenue of $712 million, a growth of 2.6% from $694 million in 2Q15. Revenue growth was driven by same-store sales growth and unit growth. Compared to 2Q15, KFC operated 769 more units.
The other two divisions, Pizza Hut and Taco Bell, posted revenue declines of 6.8%, and 2.7%, respectively. Outside China, the company has refranchised 300 restaurants in the last 12 months in order to increase franchised restaurant percentage to 96% by 2017. This has led to a decline in company-operated restaurants. It has also led to a decline in 2Q16 revenue. Negative same-store sales growth at Taco Bell restaurants also contributed to the decline in revenue.
Peer comparisons
Peers Domino’s Pizza (DPZ), Starbucks (SBUX), and Papa John’s (PZZA) are expected to post year-over-year revenue growth of 8.9%, 9.4%, and 3.8%, respectively, in 2Q16.
What’s the outlook?
After YUM announced its 2Q16 results, analysts lowered their revenue estimates by 0.6% for the next four quarters. Currently, they’re expecting Yum! Brands to post revenue of $3.5 billion and $4.1 billion in 3Q16 and 4Q16, respectively.
Overall, for fiscal 2016, analysts are expecting the company to post revenue of $13.3 billion, which represents a growth of 1.6%. In 1Q17 and 2Q17, analysts are expecting YUM to post year-over-year revenue growth of 2.4%, and 4.2%, respectively.
In the next part of this series, we’ll look at Yum! Brands’ same-store sales growth.