3 Takeaways From Yum Brands (NYSE:YUM) Q4 2015 Earnings

  • Yum! Brands beats earnings estimates for Q4 2015.
  • Pizza Hut was a weakness while Taco Bell performed well in 2015.
  • Yum! Brands’ profitability and free cash flow improved in 2015.

On 3 Feb 2016, global restaurant conglomerate Yum Brands (NYSE: YUM) came out with its Q4 FY 2015 earnings report. Earnings per share, excluding special items, came in at $0.68 exceeding expectations. As expected, Pizza Hut served as a weakness while Taco Bell blew it out of the water. The strong dollar reared its ugly head as a headwind, and management discussed the significance of Yum China. However, Yum Brands ended 2015 on an ok note.

Consumers Want Value

As anticipated, the Pizza Hut brand served as Yum! Brands’ greatest weakness in the most recent quarter, as well as for the full year (see table below), in terms of same store sales. By contrast, Taco Bell served as the company’s greatest strength outside of China. The reason for this is simple, consumers in softening economies such as China want value and pizza is simply perceived as a luxury they could do without. On the other hand, Taco Bell, which offers five items for $4, appeals to global consumers who want to get the greatest bang for their buck.

Yum! Brands Same Store Sales Changes by Division
Division Q4 2015 Q4 2014 FY 2015 FY 2014
Pizza Hut Casual Dining within China Division -8% -9% -5% -5%
Pizza Hut Division 1% 0% 1% -1%
KFC Division 3% 4% 3% 3%
Taco Bell Division 4% 6% 5% 3%
KFC Division within China Division 6% -18% -4% -4%

Source: SEC Filings

Strong Dollar Had An Effect

The strong dollar had a negative effect on many global multinational companies and Yum Brands was no different. In the most recent quarter, foreign currency translations negatively impacted EPS growth by 6% and sliced off $37 million from its reported operating income line. For the full year, the strong dollar lopped off $107 million of Yum Brands’ reported operating income.

Solid Fundamentals In 2015

Yum! Brands had an ok year in 2015. Overall, its reported revenue declined 1.3% YoY. However, its net income and free cash flow increased 23% and 15% YoY, respectively, which is amazing considering the currency and macroeconomic headwinds the company faced last year. Margin expansion gives an indication of cost reduction and improvements in productivity, serving as a catalyst for net income improvement. Moreover, a 6% YoY reduction in capital expenditures contributed to the expansion in free cash flow.

In 2015, Yum Brands’ long-term debt declined 0.7% YoY to $3.05 billion, down from $3.07 billion in 2014. Times interest earned improved to 14 in 2015 versus 12 in 2014, meaning that Yum Brands sports a high margin of safety when it comes to interest coverage. However, the company wants to issue debt in the near future to pay for capital return initiatives. Yum China will remain light on the leverage front. Investors may want to keep an eye on this and weigh accordingly when developing an investment strategy with Yum Brands/Yum! China as the spinoff approaches.

Yum Brands’ dividend remains in solid shape. In 2015, the company paid out 63% of its free cash flow in dividends. Currently, the company pays its shareholders $1.84 per share per year and yields 2.3% annually.

Looking ahead

Yum! Brands plans to slow down the pace of openings in China for 2016, opening 600 outlets versus 743 in 2015. Also, the company wants to provide value to its customers by expanding the use of box meals throughout the globe and introducing new products to increase customer excitement. Keeping costs under control remains a focus for the company. Yum Brands’ management seems committed to building its brands and maintaining financial discipline while returning capital to shareholders. As long as they can do this Yum Brands stock deserves a spot in your portfolio.

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