While U.S. markets are bouncing back after yesterday’s breather, Yum! Brands, Inc. (YUM) shares are taking a hit today, falling about 19%. The reason for the bloodbath today can be summed up in one word: China.
After the market close yesterday, Yum! Brands released weaker-than-expected third-quarter 2015 results and also lowered its full-year earnings guidance. Third-quarter earnings per share increased 14.9% year-over-year to $1, while total revenues grew just 2% to $3.42 billion. Analysts were looking for earnings of $1.07 per share on $3.68 billion in sales, so the company missed both earnings and sales estimates.
The cause for the weak third quarter is being attributed primarily to Yum! Brands’ China sales, which account for more than half of the company’s operating profit. Same store sales in China only rose by 2% in the third quarter, well below expectations for 9.6% growth. Even India, a promising market for the company, had sales decline 18%, well below analysts’ expectations for a 5.4% fall.
Company management noted that Yum! Brands is facing some serious and unexpected headwinds in its biggest market, China. Food-safety concerns have weighed on the company’s results in the region for the past several years, but Yum! Brands has taken steps to improve its Chinese sales this year. The company has tweaked its marketing strategy, changed its menu and even opened an upscale Italian restaurant in Shanghai.
However, recovery in the China market is still slow, and as a result, Yum! Brands lowered its profit outlook for full year 2015. The company is expecting same-store sales in China to slide by a low single-digit percentage. And full-year earnings growth is only supposed to rise by a low single-digit percentage, well below analysts’ current expectations for 13.6% annual earnings growth.
I would not be surprised if analysts start to adjust their earnings and sales estimates lower for the fourth quarter and full year 2015. The stock already receives a D-rating for sales growth, earnings growth and earnings momentum, but given the latest development, its B-rated analyst earnings revisions and earnings surprises is likely to be downgraded. So even though Portfolio Grader currently ranks YUM as a B-rated buy, I would be wary of this stock right now.