Yum Brands Investors Focusing On Weak China Comps In Q3

Yum! Brands, Inc. (NYSE: YUM) reported its Q3:16 results modestly below expectations, and BTIG’s Peter Saleh believes investors are likely to focus on “China comps and the lack of expected improvement.”

Saleh maintains a Neutral rating on the company.

China Concerns

“While the margin performance was encouraging, we remain concerned about the volatility in China sales and the impact on the segment’s outlook ahead of the separation,” the analyst mentioned.

For Q3, Yum reported its adjusted EPS at $1.09, marginally below the estimate and consensus, driven by a higher share count and increased G&A, partly offset by a lower tax rate.

“Restaurant-level profit was relatively in-line as stronger restaurant margin in China and to a lesser extent at KFC was offset by weaker China comparable sales which decreased compared to our 3.0 percent estimate,” Saleh reported.

China Comps

China comps of -1 percent includes a 1 percent decline at KFC and a 4 percent decline at Pizza Hut Casual Dining, with results failing to register the expected improvement.

The company indicated, however, that the sales impact had waned in August and September.

According to the BTIG report, “Management cited difficult comparisons in the second half of the quarter as well as protests and negative sentiment towards Western brands following the mid-July ruling from an international tribunal related to China’s territorial claims in the South China Sea.”

Restaurant-level margin in China, however, grew 260 bps, beating the estimate, driven by lower occupancy and food costs, partly mitigated by increased labor.

Yum has raised its core operating profit growth guidance from 14 percent to at least 15 percent, while affirming the separation date of October 31.

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