Yum! Brands (NYSE:YUM), the parent of fast-food chains KFC, Taco Bell, and Pizza Hut, witnessed a challenging quarter recently, as evidenced by a disheartening earnings report. The market sent the stock down more than 7% in after-hours trading on Tuesday as the company's China sales -- a big point of focus among investors and analysts -- ended up in the proverbial gutter. The top- and bottom-line earnings miss had the extra discomfort of being seated next to poor forward-looking guidance, giving investors very little to feel good about. Let's take a closer look at earnings to see if there are any reasons the market may be overreacting to Yum!'s short-term woes.
While management had originally expected the Chinese poultry scandal to blow over, third-quarter results proved otherwise. The company's most important market saw a brutal drop-off in earnings and same-store sales. In the region, KFC saw its same-store sales decline by 14%, while Pizza Hut was down 5%. The company also wrote down $258 million of its investment in Little Sheep -- a hot-pot chain it acquired in 2011.
Things were better in the U.S., though not worthy of any celebration, either. Same-store sales came in flat, with Taco Bell still performing strong at a 4% gain, and KFC dropping 4%. Pizza Hut dropped 1%.
All in all, the company saw its earnings drop a drastic 68% for the quarter to just $152 million, or $0.85 per share. Analysts had been expecting $0.93 per share.
For the full year 2013, management now expects high single- to low double-digit drops in profit -- worse than previously forecast. Same-store sales in China are expected to continue on in negative territory.
The market's sell-off is understandable, as the company just wasn't able to do enough damage control in its crucial Chinese market. Luckily for investors, though, there are bright spots, and the long-term fundamentals remain intact.
Even though China results were positively dismal, and the U.S. was carried by Taco Bell, Yum! is still seeing phenomenal growth in emerging markets -- up 11% year over year. It wasn't enough to soften the blow of its bigger markets, but the company's EM operations are growing and, over time, they will play a bigger part in earnings.
Don't think that the China segment is doomed, either. Yum! is planning on opening 700 new stores in China next year alone. The long-term opportunity there remains absolutely tremendous, and the company has an unparalleled market position.
Management sees a 20% EPS gain in 2014 and is faithful in its double-digit EPS growth in the coming years. For investors interested in the long term, view this pullback as an opportunity. The stock may not rebound quickly, as its fourth quarter won't hold much in the way of good news, but this is still the emerging-market-dominating fast-food play.
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