Yum! Brands, Inc. (YUM) Misses Q3 EPS by 8c; China Comps Down 11%

(Updated - October 8, 2013 4:27 PM EDT)

Yum! Brands, Inc. (NYSE: YUM) reported Q3 EPS of $0.85, $0.08 worse than the analyst estimate of $0.93. Revenue for the quarter came in at $3.47 billion versus the consensus estimate of $3.53 billion.

* Worldwide system sales grew 1%, prior to foreign currency translation, including 5% growth at Yum! Restaurants International (YRI). System sales declined 2% in China and were flat in the U.S.

* Same-store sales declined 11% in China. Same-store sales grew 1% at YRI and were flat in the U.S.

September same-store sales, which will be included in China Division’s fourth-quarter results, declined an estimated 11% for the China Division. This included estimated growth of 6% at Pizza Hut Casual Dining and an estimated decline of 13% at KFC, where sales have not yet fully recovered from the adverse publicity surrounding the December poultry supply incident.

Based on KFC China sales for September, it is now unlikely China Division same-store sales will be positive for the fourth quarter. Given lower-than-expected China sales and a higher-than-expected full-year tax rate, the Company now estimates a high-single to low-double-digit full-year EPS decline versus prior year, excluding Special Items. This compares to our previous guidance of a mid-single-digit decline in EPS.

Despite the disappointing third-quarter performance, I remain as confident as ever in our ability to deliver strong, sustainable growth in the years to come. Given a slower-than-expected sales recovery at KFC China and a higher-than-expected tax rate, we are now estimating a high-single to low-double-digit percentage decline in full-year EPS versus prior year, excluding Special Items. Our revised full-year EPS outlook is obviously well below our 11-year track record of double-digit growth through 2012. We also recorded a significant non-cash Special Item charge for the write-down of Little Sheep intangible assets. Little Sheep remains the number-one brand in China’s largest casual dining category, and we remain committed to this concept as an engine of future growth< commented CEO David C. Novak.

Even with our recent challenges, KFC is unquestionably the category leader in China and we remain confident sales will fully recover from the adverse publicity surrounding the December poultry supply incident. Our Pizza Hut business in China continues to deliver strong results, and the rest of Yum! is performing generally as expected for the full year. I’m pleased with the strong margin performance in China in the face of significant sales deleverage, along with the fact that Taco Bell has produced seven consecutive quarters of positive same-store sales growth. We remain on the ground floor of global growth and continue to have unparalleled development opportunities. As evidence of this, we expect to open at least 700 new units in China this year, as we capitalize on the world’s fastest growing consuming class. Outside of China, we expect record new-unit openings for Yum! Restaurants International and in India this year. When you add it all up for Yum!, we will open at least 1,850 new restaurants outside the U.S., further strengthening our leadership position in emerging markets. In addition, we will have net new-unit growth in the U.S. for the second consecutive year.

For earnings history and earnings-related data on Yum! Brands, Inc. (YUM) click here.

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