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Yum! Brands Stock Wobbles on Weak Q2 2018 Same-Store Sales Growth

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Second-quarter performance

Yum! Brands (YUM), the owner of KFC, Pizza Hut, and Taco Bell, reported its second-quarter earnings today. It posted adjusted EPS of $0.82 on revenue of $1.37 billion, beating analysts’ EPS expectation of $0.74 and revenue estimate of $1.35 billion.

However, its SSSG (same-store sales growth) of 1% fell short of analysts’ expectation of 2%, leading to a fall in YUM stock. It was trading ~2.5% lower in pre-market hours.

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During the quarter, KFC posted SSSG of 2%, outperforming analysts’ expectation of 1.9%. SSSG for Pizza Hut and Taco Bell fell short of analysts’ expectations. Pizza Hut’s SSSG declined 1% compared to analysts’ expectation of a 1% rise, and Taco Bell’s SSSG came in at 2% against analysts’ expectation of 2.7%.

Year-over-year revenue growth

Compared to revenue of $1.45 billion in the second quarter of 2017, Yum! Brands’ revenue declined 5.5% due to refranchising of company-owned restaurants in the last four quarters. In the second quarter, it franchised 51 restaurants, including 28 KFC restaurants and 23 Pizza Hut restaurants. By the end of the second quarter, 97% of Yum! Brands’ restaurants were franchised.

Some of the declines in revenue were offset by an increase of 8.3% in franchise and property revenues and $272 million collected from franchisees for advertising and other services. According to the new accounting standard, the company has to recognize all its upfront fees from franchisees as revenue.

EPS growth

Yum! Brands posted EPS of $0.97 in the second quarter. However, removing special items, its adjusted EPS was $0.82, which represents a growth of 20.6% from $0.68 in Q2 2017. EPS growth was driven by the expansion of its operating margin from 28.9% to 32.8%, a lower effective tax rate, and share repurchases.

Yum! Brands’ effective tax rate for the quarter came in at 9.9% compared to 33.8% in Q2 2017. In the last four quarters, the company has repurchased ~27.6 million shares for $2.23 billion. Share repurchases drive the company’s EPS by lowering the number of shares outstanding.

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