The operator of Taco Bell, Pizza Hut, and KFC fast food chains, Yum! Brands, Inc. (YUM), recently reported fourth-quarter 2009 results that modestly surpassed the Zacks Consensus Estimate on the heels of commodity deflation, lower costs and growth across China and International divisions. Results were offset by a sluggish performance in the U.S. division.

Yum!’s quarterly earnings of 50 cents a share exceeded the Zacks Consensus Estimate of 48 cents, and was up 4 cents from the prior-year quarter.

For fiscal year 2009, earnings came in at $2.17, a penny above the Zacks Consensus Estimate, and climbed 13% year-over-year, comfortably surpassing the company’s annual earnings growth target of 10%. Results were buoyed by a record number of restaurants opened in mainland China and internationally.

Management hinted at achieving its annual growth target of 10% in earnings in fiscal year 2010. The current Zacks Consensus Estimate for fiscal year 2010 is $2.38 per share, which is up nearly 10% from 2009 earnings.

Zacks Estimate Trend

The current Zacks Consensus Estimate of 53 cents a share for first-quarter 2010 has remained stagnant for the past 30 days, with only one out of 21 analysts covering the stock raising an estimate, the impact of which is not material on the consensus. In terms of earnings surprises, Yum! outperformed the Zacks Consensus Estimate in fourth-quarter 2009 by 4% and by 19% in the third quarter, with the four-quarter average being 15%.

Quarterly Performance

Lower labor (down 3%) and food costs (down 5%), slide in G&A expenses (down 8%), and operating profit growth in both China (up 24%) and Yum! Restaurants International (YRI) (up 15%) divisions drove earnings, offset by a 23% decline in the U.S. division’s operating profit.

Comparable restaurant sales dropped 3% in mainland China and 2% in other international markets in the quarter. Comps fell sharply by 8% in the U.S. , including a decline of 12% at Pizza Hut, 8% at KFC and 5% at Taco Bell. Earlier the company had expected comparable-store sales to fall 3% in mainland China, 1% in YRI and 8% in the U.S during the quarter.

Shares of Yum! fell 1% or 48 cents to close at $35.34 on Wednesday. For fiscal year 2010, management expects comparable-store sales growth of about 2% in mainland China, 3% in YRI and 2% in the U.S.

Yum!’s total revenue slipped 1% to $3,365 million, registering a 15% drop in the U.S. division, offset by a 17% growth in the China division and a 3% jump in YRI. Sluggish sales in the U.S. have prompted Yum! to focus more on emerging markets. Yum! is eyeing investment opportunities in India, Russia and France.

The struggling U.S. economy with high unemployment has resulted in sluggish demand and a raging discount war among restaurant operators to lure consumers. This has toughened the competition Yum! has to face from Burger King Holdings Inc. (BKC), McDonald’s Corporation (MCD) and Chipotle Mexican Grill, Inc. (CMG).

Globally, Yum! is led by its highly profitable China operations. During fiscal year 2009, the company opened 509 restaurants in mainland China and 898 restaurants in the markets under YRI. Management expects to open at least 475 restaurants in mainland China and about 900 units in international markets in fiscal year 2010. The international markets comprise Asia (excluding China), Australia, Continental Europe, Latin America, France, Russia, India and the U.K.

Restaurant margins expanded 170 basis points to 17.6% in Yum!’s China division, and 70 basis points to 10.4% in YRI, but contracted 50 basis points to 13.5%.

The stock provides relative safety and moderate growth in a turbulent environment and exposure to faster-growing international markets, but lacks luster in the sluggish U.S. market.
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