First Impression of Yum's 3Q

Worldwide system sales were approximately flat for the quarter, as global unit expansion was enough to offset flat same-store sales in the China and international segments and a 6% same-store sales decline in the U.S. However, commodity cost deflation, general and administrative expense reductions, and the positive impact of U.S. refranchising efforts provided an earnings tail wind, resulting in a 250-basis-point operating margin improvement to 16.9%. From a regional perspective, we were encouraged by the sequential same-store sales improvement (relative to the second-quarter decrease of 4%) and a 160-basis-point operating margin expansion for the China segment, as it further demonstrated the firm's ability to shake off global economic pressures.

Management moderately raised its full-year earnings per share outlook to $2.10-$2.14, bringing the guidance in line with our estimates. Yum also introduced an earnings per share growth target of 10% for 2010, which is consistent with our projection and likely includes some benefit from the recently announced $300 million share-repurchase program.