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Coronavirus Overshadows Yum China's Fourth-Quarter Results

By Asit Sharma - Updated Feb 5, 2020 at 7:49PM

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Management prepared investors for a potentially significant hit to current-year earnings.

Yum China (YUM 0.07%) released fourth-quarter 2019 results on Wednesday after the markets wrapped for trading. Unsurprisingly, a generally healthy report was overshadowed by the impact of the coronavirus outbreak on Yum's 2020 guidance.

A snapshot of the fourth quarter

The operator of Pizza Hut, Taco Bell, and other restaurant brands in China reported a year-over-year revenue increase of 6% to $2.03 billion. Same-store sales rose by 2%, led by 3% growth in KFC sales, offset by flat Pizza Hut business. 

Restaurant margin, a measure of store-level profitability, advanced by 90 basis points to 12.4%. The higher sales levels and improved restaurant margin boosted Yum's operating profit to $94 million, against $84 million in the prior-year quarter.

A murky current-year outlook

The Shanghai skyline at night.

Image source: Getty Images.

In Yum's earnings release, management described the coronavirus epidemic, which originated in China's Wuhan province, as a "complex and rapidly evolving" situation. Executives are currently unable to predict the complete impact of the virus outbreak on Yum's earnings, and they warned shareholders to expect a "materially adverse impact."

As a precautionary measure, Yum has temporarily shuttered roughly 30% of its stores. Restaurants that remain opened notched a 40%-50% decrease in same-store sales during the important Chinese New Year holiday.

In the release, CEO Joey Wat affirmed that the company's first priority is the health and safety of its employees. However, Ms. Wat stated: "Despite this challenge and disruption to our business, we remain confident in the long-term market potential in China."

Going forward, the immediate picture is saturated with uncertainty. Yum China warned on Wednesday that it may end up posting an operating loss in the first quarter of 2020, and potentially a loss for the entire year. Shares fell roughly 3% in extended trading following Yum's filing.

Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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