Results a Mixed Bag, But Yum Brands Still Compelling
Both Yum China and the new Yum Brands are finding ways to drive impressive core operating profit gains.
Ahead of the widely anticipated spin-off of Yum China later this month,
While favorable food costs and value-added tax changes in China played a role the profitability gains, we also see evidence that menu innovations, more comprehensive value/bundling efforts, improved store productivity metrics, and digital enhancements are helping Yum adapt to changing consumers views on value and convenience. We believe this bodes well for future sales trends--even factoring in limited near-term pricing opportunities in the U.S. amid industry promotional activity and deflationary food at home price trends--and helping to negate wage increases. In our view, this adds support to the brand intangible asset behind our wide moat rating while reinforcing both Yum Brands and Yum China as compelling longer-term cash flow stories.
There is no change to our $96 fair value, as the China and Pizza Hut top-line softness will be offset by the solid Taco Bell and KFC results and companywide margin gains. With management expecting China comps to remain positive for the balance of the quarter and expectations of continued momentum at KFC and Taco Bell, we find the updated core operating profit outlook realistic.
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