How Yum! Earnings Could Slide as McDonald's and Burger King Jump

Yum! Brands (NYSE: YUM  ) will release its quarterly report on Tuesday, and the stock has seen its share of rises and falls throughout 2013. Yet the big question that investors are focused on is whether Yum! earnings will decline from year-ago levels even as rivals McDonald's (NYSE: MCD  ) and Burger King (UNKNOWN: BKW.DL  ) have analysts expecting at least modest growth in their respective fast-food businesses.

Yum! is the company behind Kentucky Fried Chicken, Taco Bell, and Pizza Hut, and its success has largely hinged on an aggressive push into the rapidly growing Chinese market. Yet that strategy has caused some problems for the company lately, as both it and McDonald's have suffered at the hands of an avian flu epidemic in China that sent same-store sales plunging. How long will the slowdown last, and can Yum! recover from its lingering effects? Let's take an early look at what's been happening with Yum! Brands over the past quarter and what we're likely to see in its report.

Stats on Yum! Brands

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$3.53 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

Can better times in China rescue Yum! Brands earnings?
Analysts have had mixed views on Yum! earnings in recent months. They've reduced their third-quarter estimates by a penny per share, but they've boosted their full-year 2014 projections by twice that amount. The stock has moved up and down sharply but on the whole has ended up little changed, rising just 1% since early July.

Much of the the company's recent trouble stems from China's problems. In its second-quarter report, Yum! reported an almost 12% drop in earnings per share, with overall sales falling 8.5%. China was a huge part of Yum!'s shortfall, as same-store sales in the emerging-market nation fell 20% during the quarter. McDonald's saw weakness earlier in the year as well because of China, but Yum!'s exposure there is more substantial. Rather than using the broad-based joint-venture approach that Burger King has adopted throughout much of the world, Yum! has instead pressed hard in making China a central focus.

Yet Yum! seems to be turning the corner in China. Even though comps in the nation are still posting double-digit losses, monthly sequential numbers are starting to show improvement. Moreover, strength in Yum!'s Pizza Hut segment demonstrates that restaurant-goers are getting over their fears more generally, even if the chicken scare is still holding KFC's results back. As a result, Yum! remains confident about its expansion plans both within China and in other high-growth areas like India and Africa, with plans to open hundreds of new stores by the end of the year.

Closer to home, Yum! is paying homage to the rise of fast-casual specialty outlets. Its KFC eleven concept tries to cash in on the success of Chipotle's (NYSE: CMG  ) limited menus and transparent assembly-line viewing experience. Even though Taco Bell might seem like a more obvious competitor to Chipotle than KFC, success with KFC eleven could lead Yum! in a brand-new yet profitable direction domestically to boost its sales.

In the Yum! earnings report, watch for numbers from China, but also look past the region to how the business is doing around the world. Pockets of strength will likely show up in many places, helping to put the news from China in better perspective from a company-wide standpoint.

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