Yum! Brands (NYSE: YUM), a chain of restaurant trademarks that competes with McDonald's (NYSE: MCD), Burger King (NYSE: BKC), and Wendy's/Arby's Group (NYSE: WEN), delivered up a nice hot serving of earnings on Tuesday after the bell.
For the second quarter, net sales dropped 7%. Earnings on an adjusted basis increased 10% to 50 cents per share. This was actually much better than analysts' expectations. Wall Street was only counting on 43 cents per share, according to Bloomberg. However, the market is always looking forward, so there was a bit of bad news in terms of guidance pertaining to same-store sales.
Bloomberg reiterated the information contained in the company press release about comps possibly being below expectations in the near future. It's a fair point, I suppose. In fact, this was possibly the reason why the stock lost almost 4% in yesterday's after-hours session.
I don't think Yum! Brands should be excommunicated by the market over this issue, though. Management made the point that a positive offsetting element may be found in rising restaurant margins. This metric will benefit from commodity deflation. Shareholders should regard that as a cool thing.
However, management also concedes that the recession is hampering spending at its restaurants. There's no doubt about it, the economy continues to be rough. Yum! Brands has to keep ahead of the curve when it comes to marketing and promotions to keep the profit beats coming. Indeed, the company also went beyond expectations in Q1.
I wouldn't initiate a new position in Yum! Brands just yet, but I think the stock could be a buy on dips considering its recent price action. It's been doing well this year, and shares aren't too far from the 52-week high. Keep this one on a watch list.
Disclosure: I don't own any company mentioned; positions can change without notice.
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