Yum! Brands () issued strong first-quarter results after the close Wednesday that showed improving domestic performance but cost pressures in its fastest-growing markets. We still believe Yum! Brands is the best way to play restaurant expansion in emerging markets (namely China), but the firm’s shares already reflect this opportunity, in our opinion. We are sticking with our fair value estimate ($55 at the high end of our estimated range).
Worldwide systems sales of the owner of Pizza Hut, Taco Bell and KFC Chains grew 7% (before currency) during the quarter, propelled largely by 28% growth in China (growth in the US was meager at just 1%). On a reported basis, total revenues advanced 13%. However, the domestic top-line performance was negatively impacted by the decision to shed Long John Silver’s and A&W All-American Restaurants late last year, so we’re not overly concerned. Same-store sales jumped 14% in China, 5% at Yum! Restaurants International (YRI) and 5% in the US, the latter helped by improved performance at Taco Bell. Impressively, the company opened 168 new restaurants in China, and we continue to be amazed at the operational prowess of the firm to manage such continued aggressive expansion. We’re also not too concerned about the slowing same-store-sales expansion in China, as 14% is still a very nice pace, even though it’s down from 21% year-over-year expansion in the previous sequential quarter.
The firm successfully translated this strong revenue performance into solid gains on the operating line. Worldwide operating profit jumped 15% (before currency) thanks to a 14% increase in China, a 9% increase at YRI and a 27% advance in the US, the latter bolstered by a 5.2 percentage point increase in its operating margin. We view the US strength as a very positive sign for the domestic economy. On a reported basis, consolidated operating profit jumped a whopping 61%. Earnings per share, adjusted for special items, increased 21% in the period, to $0.76 (consensus was at $0.73).
Though the company faced some margin pressure in its China operations due to higher wage-rate and commodity inflation, up 17% and 10%, respectively, management still raised its full-year earnings guidance to at least $3.22 per share, or at least 12% growth, excluding special items. The updated forecast, however, was still below ours ($3.35 per share) and consensus estimates.