BofA Doesn’t Think Yum! Brands is Too Tasty Ahead of Earnings Beat

Andrew Klips  |

Yum Brands, Inc. (YUM) was hit with an analyst downgrades on Tuesday morning, only hours ahead of it releasing its financial report for the first quarter after the closing bell. The report stated that sales in China were impacted substantially “by adverse publicity from the poultry supply situation in late December 2012,” however earnings from the quarter handily topped Wall Street expectations.

For the quarter, Yum Brands, who operates about 5,300 restaurants (primarily Kentucky Fried Chicken locations) in China, reported revenue of $2.54 billion, down from $2.74 billion in the first quarter of 2012. Net income fell to $337 million, or 72 cents per share, compared to $458 million, or 96 cents per share in last year’s quarter. Excluding special items, Yum’s earnings were 70 cents per share, versus 76 cents per share in the year prior quarter.

Analysts were expected the company to earn 60 cents per share on revenue of $2.56 billion.

Same-store-sales in China were 20 percent lower, while increasing 2 percent in the United States and 1 percent at other YRI (Yum Restaurants International). Global restaurant margins declined by 2.7 percentage points to 15.9 percent on the back of a 7.0 percentage point fallout in China, offset in part by a 2.4 percentage point increase in the States and 1.4 percentage points at YRI.

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In addition to Chinese regulators reporting in December that some of Yum’s KFC chicken in China contained excessive amounts of antibiotics, the company has also suffered from lower sales due to a new strain of Avian bird flu breaking out in the country.

Operating profit in China locations plummeted 41 percent during the first quarter. U.S. and YRI locations saw increases of 5 percent and 19 percent, respectively.

“While better than expected, the first quarter was extremely difficult for Yum! Brands,” commented David C. Novak, chairman and chief executive at Yum. “As anticipated, intense media attention surrounding poultry supply in China significantly impacted KFC sales and profit.”

Yum, who operates Pizza Hut, Taco Bell and KFC restaurants worldwide, noted that the negative media around poultry supply in China has now subsided, but added that there is “no doubt” that 2013 will be a challenging year at Yum.

Early Tuesday, Bank of America made a stark reversal in its rating of Yum, downgraded it to “underperform” from “buy” and lowered its price target from $80 to $60 per share.

Yum has pinned a lot of its growth prospective of expansion in China, a meal that is somewhat hard for investors to digest recently given the less-than-expected growth of the world’s second biggest economy and recent concerns of mutating bird virus strains.

Shares have been tossed and turned over the last year and were down about 10 percent as of Tuesday’s close at $64.15 (down 1.7% on the day). The earnings beat helped buoy shares to reverse some of those losses in extended trading, perking back upwards to $68 per share.

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