YUM! Brands (YUM) To Report Q3 Earnings: What's In Store?

YUM! Brands, Inc. (NYSE:YUM) is scheduled to report third-quarter 2019 results on Oct 30, before the market opens.

In the last reported quarter, the company’s earnings and revenues topped the Zacks Consensus Estimate by 5.7% and 2.7%, respectively. On a year-over-year basis, its bottom line grew 15%. The company’s shift to refranchising substantially aided the operating margin and in turn boosted earnings. Total revenues, however, were down 4% from the year-ago level. This downside was caused by a decline in sales, owing to continued refranchising initiatives.

Markedly, over the trailing four quarters, its earnings surpassed estimates on three occasions but missed in the other, resulting in average negative surprise of 6.32%.

How are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release.

For the quarter to be reported, the Zacks Consensus Estimate for earnings per share has been stable at 95 cents over the past 30 days. However, this indicates a decrease of 8.7% from $1.04 per share reported in the year-ago quarter. Revenues are expected to be $1.35 billion, suggesting a 3.3% decrease from the year-ago reported figure of $1.39 billion.

Top Line to Suffer

YUM! Brands is expected to have suffered from a sales slump, which can be attributed to continued refranchising initiatives. 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.

Earnings Expectations

Despite high cost of operations, franchising is likely to have aided YUM! Brands’ third-quarter 2019 earnings. We note that refranchising a large portion of the system reduces the company’s capital requirements, and facilitates earnings per share growth and ROE expansion. Free cash flow has been increasing, thereby facilitating reinvestments to increase brand recognition and shareholder return. This is likely to have continued in the third quarter. Remarkably, this shift to refranchising has substantially benefited YUM! Brands’ operating margin over the years.

However, foreign currency translation is expected to have weighed on its bottom line. YUM! Brands’ KFC brand exposure to several countries (like China, Australia and the UK) whose currency has depreciated relative to the U.S. dollar might have been a drag on EPS growth.

Although KFC and Taco Bell's system sales growth is likely to have positively contributed to its third-quarter performance, Pizza Hut’s U.S. business is expected to have hurt the same.

Notably, YUM! Brands has been accelerating the transition of Pizza Hut U.S. asset base to truly modern delivery carry-out assets. This transition will ultimately strengthen the U.S. Pizza Hut business and position it well for faster long-term growth. However, this will temporarily decelerate the pace of new unit developments for the Pizza Hut division as continued healthy international unit growth will be partially offset by a short-term decline in the absolute number of U.S. units. This is likely to reflect in third-quarter results as well.

Here is What Our Quantitative Model Predicts:

Our proven model does not conclusively predict an earnings beat for YUM! Brands this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that’s not the case here.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: YUM! Brands currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks Worth a Look

Here are a few stocks from the Retail-Wholesale sector that investors may consider, as our model shows that these have the right combination of elements to post an earnings beat in the third quarter.

Dunkin' Brands Group, Inc. (NASDAQ:DNKN) currently holds a Zacks Rank #2 and has an Earnings ESP of +2.15%.

Wingstop Inc. (NASDAQ:WING) presently has a Zacks Rank #2 and an Earnings ESP of +5.62%.

Shake Shack, Inc. (NYSE:SHAK) currently has an Earnings ESP of +3.34% and a Zacks Rank #2.

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