YUM

Is the Worst Behind China?

by

Summer was not very kind to the Chinese economy. We’ve seen the country hit by concerns of credit overexpansion, as well as negative manufacturing data and declining exports. On top of macro issues, companies that usually prosper in China like Nike (click ticker for report: ) and Yum! Brands (click ticker for report: ) posted weak results. However, after bottoming out at 47.7 during July, the HSBC China Manufacturing PMI compiled by Markit turned modestly positive at 50.1 during the month of August (anything above 50 represents expansion). Industry destocking appears to be mostly completed, and manufacturers are receiving more new orders. HSBC’s lead Asian economist Hongbin Qu implied the economy had bottomed, saying in the press release: “The final … Read more

China Still Plagues Yum! Brands

by

In an 8-K filed Monday afternoon, fast food giant Yum! Brands (click ticker for report: ) announced terrible July results in its Chinese division. Same-store sales declined 13% compared to the prior year, with same-store sales down 16% year-over-year at KFC, partially offset by 3% same-store sales growth at Pizza Hut. This implies that sales declines accelerated through the course of July, reversing the improving trend management mentioned on the second quarter conference call. Same-store sales declines had moderated in June to 10%, and it appears the firm’s sales in China could be decelerating even more dramatically (heading into August). Image Source: Valuentum, Company Filings As we can see in the above chart, same-store sales declines in the first half of 2013 … Read more

Weakness at Yum! Extends Beyond China

by

Global fast food player Yum! Brands (click ticker for report: ), owner of KFC, Taco Bell, and Pizza Hut, reported weak second quarter results Wednesday afternoon as the Chinese poultry scandal and an outbreak of avian flu weighed on the firm’s sales in China. The company’s revenue fell short of consensus expectations, declining 8% year-over-year to $2.9 billion. Earnings-per-share was even weaker, falling 16% year-over-year to $0.56 per share on an adjusted basis—slightly above consensus estimates. Year-to-date, free cash flow has totaled $257 million or 18% of revenue—a relatively strong number, in our view. The most obvious problem at Yum! Brands remains its China division, specifically KFC. If a tainted poultry scandal weren’t enough, the outbreak of avian flu in … Read more

China Exports Suffer in June

by

Yet another bearish story came out of China Wednesday morning, this time dealing with negative trade data (shown right). Exports for the month of June dropped 3.1% year-over-year versus a consensus expectation of 4% growth. This compares to anemic 1% growth in May. Imports also fell 0.7% year-over-year compared to a consensus expectation of 8%. Without question, we think it’s safe to say growth slowed in China during May and June. (Image Source: The Wall Street Journal). Though these figures were decidedly bearish regarding the health of economic activity in China, Alcoa (click ticker for report: ) provided bullish commentary on the region just yesterday. In fact, management at Alcoa believes China will drive the lion’s share of global growth … Read more

China News Flow Remains Bearish

by

Earlier this week, the HSBC China Manufacturing PMI was released for the month of June, coming in at 48.2—marginally below the flash PMI of 48.3 we saw earlier in the month (and signaling further contraction). Image Source: Markit, HSBC It seems as though the economic decline in China is worsening, with HSBC noting that job-cutting intensified during the month, registering the most job losses since the Great Recession in 2009. We continue to see several structural issues with the nation, including potential excesses in the “shadow banking system” and increasing labor costs that could make the country a relatively less attractive market for global manufacturers. The cost of Chinese real estate remains in nosebleed territory, perhaps foreshadowing signs (or symptons) of the … Read more

Does ShopHouse Justify Chipotle’s Valuation?

by

Key Takeaways: ·       Chipotle’s internal growth is slowing. ·       Chipotle’s ShopHouse concept is expanding, but we think it could divert attention from the core business. ·       We could open a bearish position in Chipotle in the portfolio of our Best Ideas Newsletter. After its price finally came down to earth in late 2012 (falling to under $250 from over $400 per share), shares of quick-serve burrito restaurant Chipotle (click ticker for report: ) have rocketed back toward the $400 level. Shares have jumped 23% year-to-date, even though the company’s same-store sales growth totaled just 1% in the first quarter. Shares now trade at a premium to our fair value ($338 per share is the high end of our fair value range). With comparable … Read more

After Midnight Breakfast at McDonald’s: Is the Company out of Tricks?

by

Late yesterday night, fast food goliath McDonald’s (click ticker for report: ) confirmed that it is experimenting with an “after midnight” breakfast menu. Let’s emphasize the after midnight aspect, which specifically means that the firm won’t be serving all-day breakfast. Such a move to all-day breakfast would be expensive, and, in our view, a sure sign the firm was out of ideas. The moves to bolster its product offering in the late night segment has logic behind it—look no further than the popularity of breakfast diners at 2-5am on Saturday and Sunday mornings. For years, Taco Bell (click ticker for report: ) has been perceived as the go-to fast food destination after midnight, at least in part due to its … Read more

McCormick Kicks Off 2013 With Strong Cash Flow

by

Spices and flavor giant McCormick (click ticker for report: ) started fiscal year 2013 with a solid first quarter. Revenue increased 3% year-over-year to $934 million, easily exceeding consensus estimates. Earnings per share rose 4% year-over-year to $0.57 per share, in-line with consensus expectations. We were pleased to see a strong surge in operating cash flow, which jumped 39% year-over-year to $32 million. McCormick’s first quarter showed a remarkable divergence between its consumer and industrial businesses. The consumer business segment saw sales jump 7% driven by a 14% sales increase in emerging markets, as well as continued strength in the US and Europe. We think McCormick’s spices provide consumers with a relatively inexpensive way to improve tastes, which is important to … Read more

The Quick-Serve Restaurant Space Could Be Poised for a Rebound

by

Wendy’s Every time we look at the restaurant space, we are surprised to see at how small Wendy’s (click ticker for report: ) market capitalization is. Shares have been stuck in neutral for the past year, even though we think the company is in a much better competitive position. Unlike McDonald’s (click ticker for report: ), which has distinctly made itself the preeminent value chain, Wendy’s has mostly held the line on pricing. Wendy’s “Right Price, Right Size” menu has helped, but overall the company has lost traffic. If economic conditions improve, we think Wendy’s could be a beneficiary versus its peers because it has maintained its quality reputation. While the levels of price differences in the burger space (Wendy’s/McDonald’s/Burger … Read more

Yum!’s China Recovery Begins

by

After warning that same-store sales could decline as much as 25% during the first quarter in the wake of a poultry supplier scandal that shook consumer confidence in China, Yum! (click ticker for report: ) reported a same-store sales decline of 20% in its China division. Same-store sales at KFC dropped 24%, while Pizza Hut’s sales fell just 2%. We gathered that after McDonald’s (click ticker for report: ) results in China were “strong,” KFC might show some signs of stabilization, and that appears to be the case. More importantly, Yum!’s China division reported same-store sales growth in February. Although aggregate same-store sales grew just 2%, same-store sales at Pizza Hut jumped 13%, and same-store sales were flat at KFC … Read more