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What to Look for When Yum! Brands Posts Earnings Results

By Demitri Kalogeropoulos - Feb 5, 2018 at 8:02AM

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Investors have big questions heading into the fast food giant's fourth-quarter report next week.

Results haven't been impressive for quick-service restaurant stocks so far this earnings season. Starbucks recently announced that sales growth was sluggish during its fiscal first quarter, and McDonald's (MCD 2.46%) noted a significant slowdown in its expansion pace, too.

Heading into the fourth quarter, Yum! Brands' (YUM 2.82%) business trends were running slightly stronger than Starbucks' and a bit behind McDonald's. With that backdrop in mind, let's look at what investors can expect the owner of the KFC, Taco Bell, and Pizza Hut franchises to announce in its report on Thursday, Feb. 8.

Solid sales growth

Yum! Brands managed a solid uptick in growth trends last quarter, as comparable-store sales improved to a 3% increase from 2% in the prior quarter. Thus, the big question on investors' minds will be whether that positive momentum continued into the fiscal year's final quarter.

A person holds a piece of fried chicken.

Image source: Getty Images.

If the results from industry leader McDonald's are any indication, Yum! Brands might announce modest revenue growth on Thursday. The burger chain's customer traffic slowed in the fourth quarter, after all. In addition, the gap between Yum! Brands' comps figure and McDonald's 5.5% metric will determine which direction market share is flowing between the two fast-food giants. For a bit more context, Starbucks' expansion pace held steady at 2% over this period.

Yum! Brands' growth rate will probably vary among the chain's three fast-food franchises. KFC, which is responsible for about half of overall profits, grew at a 3% pace over the past nine months. Taco Bell saw a much stronger 5% increase, while Pizza Hut logged a 1% decline. CEO Greg Creed and his team have made a few changes aimed at returning the Pizza Hut franchise to growth, including increased advertising spending. Shareholders will find out on Thursday whether those initiatives are gaining traction.

Profit pinch

In a break from recent trends, Yum! Brands isn't expected to announce much in the way of earnings growth this quarter. Consensus Wall Street estimates call for profits to hold steady at about $0.79 per share, in fact.

Three tacos on a plate.

Image source: Getty Images.

That's mainly due to two negative trends set to pinch profits in the fourth quarter. The biggest is Yum! Brands' 2017 refranchising initiative, which management has warned will be a temporary drag on earnings, especially in the last few months of the year. Second, the extra marketing spending to support Pizza Hut sales will lower profitability by about 3 percentage points in the fourth quarter. Thus, operating profit won't grow at anything near the 11% jump the company logged last quarter. Yet for the full 2017 year, Yum! Brands should post healthy profit growth of around 5%.

New restaurants

Yum! Brands aims to grow overall sales by about 7% each year. Rising comps play an important role in hitting that target, but it's just as critical that the company open new locations at a healthy clip. Through the first nine months of 2017, management launched 362 new restaurants, which translates to a 3% increase. Executives say they're confident that there's a long runway for unit growth both at home and in international markets -- including for the Taco Bell brand -- and so their expansion plans for the new year should look aggressive.

These successes are likely to keep the chain on track to hit its goal of $3.75 per share of annual profit by 2019, while also funding over $2 billion in direct cash returns annually, through a rising dividend and surging stock buyback spending.

Yum! Brands' stock price might wiggle for any number of reasons around its earnings release next week. But keeping your focus on these broader operating and financial trends will help you tune out any short-term distractions. 

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Stocks Mentioned

Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$116.71 (2.82%) $3.20
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$252.96 (2.46%) $6.08

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