China slowdown hurts Yum Brands

The stock gets hammered after the company forecasts negative growth in the country for the fourth quarter.

By Jim J. Jubak Nov 30, 2012 4:27PM
Image: China (Brand X/SuperStock)Shares of Yum Brands (YUM) are getting blasted Friday on the company's guidance for the fourth quarter, issued after the market close Thursday. Despite affirming its previous overall guidance for the fourth quarter, Yum is getting hammered -- shares were down $7.20 or 9.67% to $67.27 in the afternoon.

The problem is China.

After showing same-store sales growth of 21% in the fourth quarter of 2011 from China, Yum told Wall Street to expect negative same-store sales growth in the fourth quarter of 2012. For the full year, same-store sales growth in China will be just 6%.

This wouldn’t be such a huge deal -- after all, beating 21% growth in the 2011 quarter is tough -- if Wall Street didn't have such high expectations for growth from China in 2013. Before Thursday’s announcement, the consensus projection was that earnings for Yum Brands as a whole would climb 13.8% in 2013. China was forecast to be a big part of that with China profits projected to grow by a consensus 18%.

Now analysts are wondering not if they need to cut projections for 2013, but by how much. (The company’s guidance called for operating profit growth of 15% in China in 2013.) Negative same-store sales growth from China in the fourth quarter -- and the consensus seems now to be looking for a 4% drop in same-store sales in the period -- would continue the pattern of slowing growth in China that has ruled Yum Brands' business there for 2012. And analysts have a right to question management’s ability to get ahead of the story: The last forecast for fourth-quarter same-store sales for China from the company -- back in October -- called for flat to a 3% increase for the fourth quarter.

I think analysts are also worried -- since everyone on Wall Street is concerned these days about the effects of the U.S. fiscal cliff -- about the company’s conviction that strong U.S. same-store sales (+3%) will offset weakness in China in the fourth quarter and on projections for operating profits to growth by 5% in the United States in 2013 on 2% growth in same-store sales.

If you’re hearing echoes here of the recent McDonald's (MCD) story, you’re absolutely right. Both stocks are taking a hit now because of tough year-to-year comparisons on same-store sales growth after extremely good results in 2011 and early 2012. For McDonald’s, those tough comparisons start to recede with the March quarter. (McDonald’s is a member of my Jubak’s Picks portfolio.) For Yum Brands, the turn could be as early as the first-quarter year-to-year numbers.

But Yum Brands is more closely tied to its China growth story than McDonald’s is -- many investors own Yum Brands because the company is the leading fast-food (sorry, quick-service) restaurant chain in China. And the company continues to push more units into China at a rapid pace with 700 new units forecast for China (out of 1,800 new international units in all) for 2013. That’s a big capital investment -- and therefore exposure -- to China.

I’d watch Yum Brands to see if the shares continue to retreat on guidance and the company’s presentations to analysts and shareholders next week. The stock plunged straight through technical support at its 50-day moving average ($70.17) to hit support at the 200-day moving average at $67.59. Last quarter, the stock showed a strong rebound on its earnings report but Yum Brand's next earnings announcement isn’t until Feb. 4. That’s a lot of time for investors and Wall Street to stew in the worries this guidance sets up.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of Yum Brands or McDonald’s as of the end of September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 



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