(YUM) Yum! Brands Earnings Report Surpasses Estimates

Yum! Brands Inc. (YUM) reported better-than-expected first-quarter 2010 results, driven by strong performances in its China and YRI divisions.

Yum!’s quarterly earnings of $0.59 a share (excluding special charges) comfortably surpassed the Zacks Consensus Estimate of $0.53, and surged 23% year-on-year from $0.48 posted in the prior-year quarter. On a reported basis, earnings climbed 9% to $0.50 per share.

Lower G&A expenses (down 4%) and operating profit growth in both China (up 37%) and the Yum! Restaurants International (YRI) (up 2%) divisions drove the earnings. These were partially offset by a 3% increase in the company restaurant expenses and a 9% decline in the U.S. Division’s operating profit.

Comparable restaurant sales increased 4% in mainland China. However, comps fell 2% in the international markets and 1% in the U.S. The decline in U.S. comps consisted of a 5% increase in Pizza Hut, and declines of 2% at Taco Bell and 4% at KFC. Yum!’s total revenue improved 6% to $2,345 million, stemming from a 15% growth in the China division and an 1% growth in YRI, offset by 1% fall in the U.S. division.

Robust performance in the China division during the quarter was primarily driven by a 14% new unit growth. The company has strengthened its position in China by the addition of 96 new restaurants during the first quarter, bringing the total to 3,544 restaurants in China. Further, the company strengthened its footprint internationally by opening 109 new units in more than 40 countries (89% of which is with its franchisees).

Encouraged by this strength, management expects to open about 500 new restaurants in China and about 900 new units in the international markets in 2010. Additionally, the company retained its guidance of achieving at least 10% EPS growth in 2010.

In the first quarter of 2010, the company restructured its business operations to include Thailand and KFC Taiwan, which were previously a part of China Division, in the YRI. The China Division now includes solely the results of its mainland China business. Historical segment information for YRI and China Division has been restated for 2009 for consistent presentation.

At the end of the first quarter, the company had cash and cash equivalents of $444 million with long-term debt of $3,219 million, and shareholder equity of $1,117 million. Share repurchases in the quarter were $137 million for 4 million shares at an average price of $34.12 per share.

Zacks Investment Research

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