Yum Tumbles on Weak Guidance

Unfortunately the company is now estimating full-year same-store sales to be low-single-digit negative in its China division. For the fourth quarter, this assumes mid-single-digit same-store sales growth for the division, with positive same-store sales growth at KFC and negative same-store sales at Pizza Hut Casual Dining. Given a slower-than-expected recovery in China sales, particularly at Pizza Hut Casual Dining, as well as stronger foreign exchange headwinds, we now expect full-year EPS growth to be low-single-digit positive.

Worldwide system sales grew 6%. Worldwide restaurant margin increased 3.3 percentage points to 18.2%, and worldwide operating profit increased 23%. Foreign currency translation negatively impacted operating profit by $29 million.

Total international development was 376 new restaurants; 72% of this development occurred in emerging markets.

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The company listed its divisional sales as:

• China Division system sales increased 8%, driven by 7% unit growth and 2% same-store sales growth. Restaurant margin increased 4.7 percentage points to 19.6%. Operating profit increased 64%.
• KFC Division system sales increased 6%, driven by 3% unit growth and 3% same-store sales growth. Operating margin decreased 0.2 percentage points to 21.7%. Operating profit increased 3%.
• Pizza Hut Division system sales increased 2%, driven by 2% unit growth and 1% same-store sales growth. Operating margin decreased 0.7 percentage points to 25.4%. Operating profit was even.
• Taco Bell Division system sales increased 7%, driven by 3% unit growth and 4% same-store sales growth. Operating margin decreased 0.1 percentage points to 28.0%. Operating profit increased 6%.
• India Division system sales decreased 9%, as 10% unit growth was offset by an 18% same-store sales decline.

Greg Creed, CEO of Yum, said:

Third-quarter EPS grew 14%. We’re pleased same-store sales turned positive and we achieved restaurant margins of nearly 20% in our China business. However, the pace of recovery in our China Division is below our expectations. Outside of China, our Taco Bell and KFC Divisions continued to sustain their positive sales momentum while Pizza Hut was relatively flat. Given our lower full-year expectations in China, combined with additional foreign exchange impact, we now expect 2015 EPS growth to be well below our target of at least 10%.

Shares of Yum closed up 0.5% at $83.42 on its 52-week trading range of $65.81 to $95.90. After the earnings were released, shares traded down 16.4% at $69.77 in the after-hours trading session. The stock has a consensus analyst price target of $94.78.

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