Yum! Brands (YUM) Q4 Earnings To Benefit From Refranchising

Yum! Brands, Inc. (NYSE:YUM) is scheduled to report fourth-quarter 2018 numbers on Feb 7, before the opening bell.

The company’s de-risking strategy to reduce the ownership of restaurants by expanding franchise is expected to have bolstered earnings growth in the fourth quarter. Moreover, its sales-building initiatives are expected to have favored top-line growth, offsetting the negative near-term effects of franchising.

Yum! Brands has a three-year transformation plan to drive growth at KFC, Pizza Hut and Taco Bell brands. By relying extensively on the four key drivers of growth — distinctive, relevant and easy brands; unmatched franchise operating capability; bold restaurant developments; and unrivaled culture and talent — the company remains on track to achieve its target.

Backed by better-than-expected earnings in the trailing four quarters, shares of Yum! Brands have gained 7.6% over the past three months, outperforming the industry’s rally of 2.5%.

Top Line to Gain Despite Risks

In the first nine months of 2018, Yum! Brands’ revenues declined 4% year over year, mainly due to a sharp 43% decline in company sales, partially offset by a 10% increase in franchise sales. This is because reduction in ownership through refranchising has been weighing on near-term revenues.

While this may have continued to hurt revenues in the fourth quarter, the company’s strong delivery and digital initiatives are likely to more than offset the decline in revenues in the quarter under review. Subsequently, the Zacks Consensus Estimate for the to-be-reported quarter’s revenues is pegged at $1.6 billion, with a projection of a 0.7% increase from the year-ago quarter.

Refranchising to Aid Earnings

Despite having weighed on near-term revenues, Yum! Brands’ refranchising initiatives are expected to reduce the company’s capital requirements and facilitate earnings per share growth. In the meantime, free cash flow is likely to continue growing, thus, facilitating reinvestments to increase brand recognition and shareholder return. Remarkably, this shift to refranchising has been substantially benefiting the company’s operating margin over years.

In the first nine months of 2018, earnings grew 44% from the year-ago level. We expect fourth-quarter earnings to have benefitted from refranchising activities as well. The consensus estimate pegs fourth-quarter earnings at 97 cents, mirroring a 1% increase from the year-ago quarter.

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 +1.71%. 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 fourth quarter.

Chipotle (NYSE:CMG) presently carries a Zacks Rank #3 and has an Earnings ESP of +1.78%. The company is scheduled to report quarterly numbers on Feb 6.

BJ’s Restaurants (NASDAQ:BJRI) has an Earnings ESP of +2.08% and a Zacks Rank #3.

El Pollo Loco (NASDAQ:LOCO) has an Earnings ESP of +7.14% and it currently has a Zacks Rank #2.

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