YUM reported December comps for its China Division yesterday after the close. KFC comps (+5%), Pizza Hut comps (-3%), and total China comps (+2%) all missed expectations. Needless to say, it was a disappointing month. KFC, although missing expectations by 100 bps, was actually quite strong. Surprisingly, the majority of weakness came from Pizza Hut which missed expectations by 870 bps. There has been wide speculation that these two chains are seeing increased competition from local dining chains.
For the quarter, 4Q China Division (includes Sept., Oct., Nov., Dec.) comps (-4%) missed consensus estimates by 100 bps. All told, it was a disappointing end to the quarter. However, as we mentioned in our note last week, December sales numbers will not make or break our bullish thesis on YUM. The company has a substantial long-term growth opportunity in China as well as in other emerging markets.
Barring a material setback in China, we continue to expect outperformance throughout 2014. In our opinion, easy same-store sales comparisons, notable margin expansion, and positive earnings momentum will lead to multiple expansion over the next several quarters. The magnitude of this outperformance will depend heavily upon the trajectory of the recovery in China.
Howard Penney
Managing Director