What Could Heat Up Yum! Brands' Q2 Report?

Taco Bell's publicly battling McDonald's for breakfast -- but investors need to look deeper into Yum!'s earnings release.

Jul 16, 2014 at 12:06PM

Taco Bell Breakfast

Source: Taco Bell 

Yum! Brands (NYSE:YUM) will report second-quarter earnings on July 17. In all likelihood, this quarter will attract extra attention thanks to the late-March launch of a breakfast menu meant to compete with McDonald's (NYSE:MCD). So, given the company's increased focus on the profitable world of breakfast, will Yum! serve up a second-quarter surprise? 

Analysts expect $3.2 billion in revenue and $0.72 in earnings per share. Yum! beat EPS estimates for four of the past five quarters but missed on revenue in three of those quarters. These general metrics will offer a quick idea of Yum!'s health; a clearer picture exists in the segment reporting.

What should investors look for in Yum! Brands' second-quarter report?

An important note on Yum! reporting 
Yum! changed its segment reporting at the start of this year, which makes year-over-year comparisons tricky in places. Yum! formerly reported three segments: U.S., China, and Yum! Restaurants International, or YRI. The new segment breakdown includes China and India as solo segments but the U.S. and YRI melded together.

Taco Bell breakfast success?
Taco Bell spent most of the last year as Yum!'s comparable-store sales leader as KFC had a rough time in China, but that changed in the first-quarter report. 

Brand 

Q1'13

Q2'13

Q3'13

Q4'13

Q1'14

Taco Bell

6%

2%

2%

1%

(1%)

KFC

(1%)

3%

(4%)

(5%)

1%

Pizza Hut

(1%)

(2%)

(1%)

(4%)

(2%)

Same-store sales. Source: Company filings.

During the earnings call, departing CEO David Novak blamed the comps drop primarily to commodity inflation and the nonstop winter storms that plagued much of the United States. The real gem of the call came when CFO Pat Grismer said, "...Taco Bell's year will be more of a first half, second half story as we continue to build momentum with this exciting brand."

Why was Grismer's comment significant? 

Taco Bell launched a much-hyped breakfast menu in late March, which would make the quarter now reporting the first full period since the launch. Execs also wouldn't go into details regarding the breakfast performance during the earnings call, and that didn't help the impression that the new products weren't finding an audience. 

Check the second-quarter report for Taco Bell's comps but more importantly any specific information revealed about breakfast sales. No one's expecting Taco Bell to pull in a McDonald's-level audience at this point, but the products need to at least show potential. 

What should investors watch in the other two brands? 

KFC's China performance, set Pizza Hut aside 
KFC took a beating over the past year after Chinese authorities began investigating the brand's chicken suppliers for high levels of antibiotics. Yum! has since cut ties with more than 1,000 suppliers and promised customers better quality control going forward.

System sales in the first quarter were only up 1% for KFC but rose 9% for the China segment. China also boasted 17% year-over-year sales growth driven by the improvement in KFC's performance. Watch the second-quarter report for improvements in both the systemwide comps and China's comps and sales.

KFC has improved, but where does Pizza Hut stand? The underperformer for Yum! will only matter if the comps and sales move swiftly in either direction. Systemwide sales were flat in the first quarter, and comps had improved to a 2% decline. Look instead to the broad India segment to see signs of improvement in Yum!'s key growth market, which will matter more in the long term than Pizza Hut.

Competitor comparison
McDonald's should report second-quarter earnings on July 22. Analysts expect $7.3 billion in revenue and $1.44 in EPS. The company missed EPS estimates in two of the past five quarters but met revenue in all five.

Last year was rough for McDonald's comps as the company struggled with limited-time menu items that didn't find an audience. That won't stop the company from gloating about its breakfast performance if Yum! either fails to report breakfast numbers or demonstrates an underperformance. 

Foolish final thoughts 
Check how revenue and EPS compare to estimates for a quick look at Yum!'s second-quarter health, and then make sure Taco Bell, KFC, and the China segment have shown improvement. Providing breakfast specifics could also make or break the market's reaction to the report.

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Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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