Yum! Brands Earnings Broiled by China Write-Down

On a GAAP basis, Yum! reported quarterly adjusted EPS of $0.33, which excludes a $258 million impairment charge against its Little Sheep franchise in China. The company said the charge reflects a negative impact caused by a longer-than-expected purchase approval and transition, as well as negative publicity from quality issues “with other unrelated hot pot concepts in China further significantly impacted sales at Little Sheep, even though there was never an issue with the quality of Little Sheep products.”

Same-store sales in China fell 11% compared with the third quarter of last year, margins were down 1.9% and operating profit was down $11 million. Pizza Hut same-store sales rose 5% in China while KFC sales fell 14%.

The collapse in China forced Yum! to lower its full-year EPS estimate. The company had estimated a mid-single-digit decline in EPS but now believes the decline will be in the high-single to low-double-digit range. Last year’s EPS totaled $3.25, so a 10% decline would push that down to around $2.93.

The company’s CEO said what he had to say, “We expect to deliver at least 20% EPS growth in 2014 and restore our track record of double-digit EPS growth in the years ahead.”

Same-store sales in the United States are up 1% year-to-date and operating margins are up 3.3% in the U.S. In the company’s international division, same-store sales are up 1% in the third quarter and 3% year-to-date. Operating margins internationally are up 0.1%.

Yum! Brands’ results were miserable and the after-hours action is reacting as one might expect. Shares are down 6.5% at $66.99, after closing at $71.67 on Tuesday. The 52-week range is $59.68 to $75.13. Thomson Reuters had a consensus analyst price target of around $77.90 before today’s report.