Yum! Brands' (YUM) Q2 Earnings Preview: A Hit Or Miss?

Yum! Brands, Inc. (NYSE:YUM) is scheduled to report second-quarter 2016 numbers on Jul 13, after market close.

Last quarter, Yum! Brands posted a 14.46% positive earnings surprise. In fact, the company’s earnings surpassed the Zacks Consensus Estimate in three of the last four quarters, with an average beat of 5.12%. Let’s see how things are shaping up for this announcement.

Factors Likely to Influence this Quarter

We expect Yum! Brands’ U.S. division comps to continue to be strong in the to-be-reported quarter, backed by strength in the Taco Bell, Pizza Hut and KFC brands. Taco Bell’s hugely popular breakfast offerings should drive comps, while Pizza Hut comps will likely grow on the back of menu innovations and increased in-store efficiency. Meanwhile, KFC’s revamped outlets last year and introduction of healthier menu items should drive comps.

Further, backed by menu innovation, the company’s performance in some of the key developed markets is expected to remain impressive in the quarter. Meanwhile, the company’s refranchising efforts should facilitate earnings per share growth and ROE expansion.

YUM! BRANDS INC Price and EPS Surprise

YUM! BRANDS INC Price and EPS Surprise | YUM! BRANDS INC Quote

However, slowdown in emerging markets could dent sales while negative currency translation might hurt earnings. Moreover, despite recording positive comps in the past two quarters, the China division continues to face headwinds in the form of a slowing economy, food safety scandals, rising labor costs and rents, and intensifying competition from local brands.

Particularly, Pizza Hut in China continues to disappoint and is likely to keep international revenues under pressure in the second quarter. Nonetheless, Yum! Brand’s KFC division in China has been performing well over the past few months, aided by robust unit growth and popularity of the value box meals, and is expected to continue doing so.

Earnings Whispers

Our proven model does not conclusively show that Yum! Brands is likely to beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, that is not the case here as elaborated below.

Zacks ESP: Yum! Brands has an earnings ESP of -1.33%. This is because the Most Accurate estimate stands at 74 cents per share while the Zacks Consensus Estimate is pegged higher at 75 cents.

Zacks Rank: Yum! Brands has a Zacks Rank #3 which increases the predictive power of ESP. However, the company’s negative ESP makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) has an earnings ESP of +2.22% and a Zacks Rank #1.

Papa John's International Inc. (NASDAQ:PZZA) has an earnings ESP of +3.70% and a Zacks Rank #2.

Brinker International, Inc. (NYSE:EAT) has an earnings ESP of +0.81% and a Zacks Rank #3.

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