Yum Earnings: Solid Quarter Powered by Digital Sales, Value Positioning, and China Recovery

Wide-moat Yum Brands posted solid second-quarter earnings per share of $1.41, surpassing our $1.24 forecast despite missing our top-line estimate, with unit development remaining strong. The firm benefited from broad-based comparable-store sales growth of 9% globally. This in tandem with disinflationary food costs helped drive momentum in restaurant-level margin, a key driver of store-level economics and, by extension, the firm's long-term unit development target of 5% annual growth. We're encouraged by a turnaround in China; Yum's largest franchisee there opened 422 gross stores, or 41% of Yum's 1,025 gross openings in the quarter. We plan to raise our $133 fair value estimate by about 4%-5% to reflect outsize unit growth and the time value of money. This will leave the shares trading in a range that we consider fairly priced.