Yum! CEO Out to Lunch as It Faces McDonald's Growth Peak Woes

KFC Restaurant
KFC Restaurant

Yum! Brands, Inc. (NYSE: YUM) issued its reaffirmed guidance after the close on Thursday. The press release seemed harmless enough, as the company was reiterating guidance for 13% earnings growth in 2013. The report was ahead of next week's investor day, and one might wonder why the company did not hold this guidance until then.

The growth was called "at least 13%" to $3.24 earnings per share (EPS). Chairman and CEO David Novak even went on to say:

I'm pleased to report we remain on track to deliver at least 13% EPS growth this year. Our 2012 EPS growth is driven by double-digit operating profit growth, prior to foreign currency translation, in all three of our major operating divisions: China, Yum! Restaurants International and the U.S. Solid same-store sales growth at each of our divisions and record international new-unit development highlight the quality of our growth.

Thomson Reuters has a consensus of $3.28 per share, so this is short of estimates regardless of the headline that said Yum! was reconfirming its full 2012 forecast of at least 13% earnings growth. As CEO, Novak is expected to remain positive. Still, there appear to be serious issues with the growth story here when you consider that the earnings growth is expected with a 2% reduction in the shares due to buybacks.

Here is where the other problem crept up: stronger-than-expected operating performance from Yum! Restaurants International and the U.S. division offset softer sales in China. After 21% gains in same-store sales a year ago in China, Yum! now expects those same-store sales to be negative by 4%. For the full year the same-store sales growth will be about 6% in China. What is interesting is that Yum! is still targeting 10% earnings growth in China.

For 2013, Yum! sees at least 1,800 new international units, broken down as follows: 700 new units in China, 950 at Yum! Restaurants International and 150 at Yum! Restaurants India.

The press release sounds like a CEO who is trying to keep the train going. Inevitably all growth stories begin to slow down. That is what is happening here now. Shares closed at $74.47 on Thursday and the 52-week high and all-time high of $74.75 was just hit yesterday. When you see that Yum! shares are down 9.8% at $67.14 on Friday with very strong trading volume, the law of "stocks that hit new highs tend to keep hitting new highs" will be under fire.

Now the drop to $67.14 takes back all of the big gains since September and October. If you read further into it, Yum! sounds like it may be facing some of the same issues as rival fast-food giant McDonald's Corp. (NYSE: MCD). McDonald's was the best performing DJIA stock in 2011 and now it is among the worst of 2012. The difference here is that Mickey-Dee's is under a new CEO and Yum! is not. Yum! is also still only about one-third the size of McDonald's in market cap, while it is about half the size in expected revenues.

It is too soon to say that Yum! is now matching the woes of McDonald's, but some of the growth issues are there. A drop of this magnitude seems extreme for being so close. Still, this is priced for perfection. Even after the big drop today, Yum! trades at more than 20-times this year's expected earnings.


Filed under: 24/7 Wall St. Wire, Earnings Warning, Food, International Markets, Retail Tagged: featured, MCD, YUM