High Costs & Sales Slump To Hurt YUM! Brands (YUM) Q1 Earnings

YUM! Brands, Inc. (NYSE:YUM) is scheduled to report first-quarter 2019 results on May 1, before the market opens.

The company has been adopting a de-risking strategy by reducing the ownership of restaurants through refranchising. Although this will drive earnings in the long run, it is likely to have hurt the company’s revenues in the first quarter of 2019. Also, high costs associated with restaurant operations are likely to have dented earnings in the to-be-reported quarter.

Notably, shares of YUM! Brands have gained 19.6% in the past year, slightly underperforming the industry’s rally of 20.4%.

Let us find out how the company’s first-quarter results are likely to shape up.

Top Line to Suffer

Yum! Brands’ revenues in the fourth quarter were down 1.2% year over year due to a sales slump, stemming from its continued refranchising initiatives. We believe that its revenues have continued to show a downward trend in the first quarter of 2019. The de-risking strategy of the company by reducing the ownership of restaurants and expanding franchise is expected to have negatively impacted revenues in the to-be-reported quarter.

Subsequently, the Zacks Consensus Estimate for revenues in the first quarter is pegged at $1.3 billion, reflecting a 9.2% decrease from the year-ago quarter’s reported figure.

How Will Earnings Shape Up?

An increase in the cost of employee wages, benefits and insurance as well as other operating costs such as rent and energy costs led to significant pressure on the company’s margins. We believe that high costs of operations are likely to have dented YUM! Brands’ earnings in the first quarter of 2019, more so, as the Zacks Consensus Estimate for earnings in the quarter is pegged at 81 cents, indicating a 10% decline from the prior-year quarter’s reported earnings.

Our Quantitative Model Predicts a Beat

YUM! Brands has the right combination of two main ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Earnings ESP: The company has an Earnings ESP of +2.35%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: This restaurant currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Yum! Brands, Inc. Price and EPS Surprise

Other Stocks to Consider

Here are a few other stocks from the Restaurant space that investors may consider as our model shows that these too have the right combination of elements to post an earnings beat in the first quarter.

Brinker (NYSE:EAT) presently carries a Zacks Rank #3 and has an Earnings ESP of +0.28%. The company is scheduled to report quarterly numbers on Apr 30.

Cheesecake Factory (NASDAQ:CAKE) currently carries a Zacks Rank #3 and has an Earnings ESP of +0.25%. The company is scheduled to report quarterly numbers on May 1.

Dunkin’ Brands (NASDAQ:DNKN) presently carries a Zacks Rank #3 and has an Earnings ESP of +0.13%. The company is scheduled to report quarterly numbers on May 2.

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