Yum Brands Is Another Company Hurt by China Expectations

Yum!’s shares dropped as much as 18% after it announced its earnings for the most recent quarter, and the fast-food company will be fortunate if its shares do not hit a new 52-week low. Yum shares have a 52-week week high of $95.90 and a 52-week low of $65.81. Shares dropped as low at $67 after hours on Tuesday.

Yum’s share price drop was driven primarily by one number. Same-store sales were up only 2% in China. Otherwise, its China numbers were strong, which shows just how extraordinary they have to be to satisfy investors:

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%

The figures were much better than those of the entire company:

Worldwide system sales grew 6%. Worldwide restaurant margin increased 3.3 percentage points to 18.2%, and worldwide operating profit increased 23%

The reliance on China hurt as company management looked forward:

While it remains difficult to forecast China sales, we are now estimating full-year same-store sales to be low-single-digit negative. 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.

Among other companies in which management has said that growth in China is the most critical component to the future is Apple. Yum and Apple could not be more different in almost every way. Except one.

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