YUM - THE STREET IS GLOWING ABOUT CHINA

Here are just some of the comments about YUM’s quarter that have been printed in the past 24 hours:

  • China sales appear to be rebounding, muting concerns
  • YUM China turns the corner
  • Better trends out of China
  • Concerns about China business abating
  • China - strong start to FY10

Yet the company says this….

“We are particularly pleased with our business in China, which reported robust profit growth of 37% driven by both strong unit development and same-store sales growth.”

“Same-store sales grew by 4% and units expanded 14%, while restaurant margins were at a record level of nearly 27%. All combined to generate robust profit growth of 37%.”

“As we review a few of our highlights, let’s start with China. We had a very strong Chinese New Year holiday. This led the first quarter system sales growth of 15% including same-store sales growth of 4%. Sales were solid across the country including the high export regions.”

“We expect moderate same-store sales growth in China in the second quarter.”

 “We do not expect China’s exceptional margin performance in the first quarter to continue”

Granted, the numbers from China were very strong and provided an upside to the quarter despite the lackluster performance in the U.S. business.  Other than printing a 4% same-store sales figure, what leads you to believe that Yum issues in China are behind them?

  • Margins seen in China in 1Q are unsustainable
  • YUM needs to see a 10% 2Q same store sales number from China to maintain 2-year trends.  Anything less than 2% will produce a lower low from the -1% 2-yr trend Yum China saw in 4Q09. 
  • Average unit volumes declined 3% in 1Q10 - we know what that means

As I wrote yesterday, we have been short YUM, which has been the wrong call, particularly into first quarter numbers, which came in better than both sales and earnings expectations.  That being said, I continue to have my concerns, largely related to what I recognize as overly aggressive unit growth in China and profitability issues in the U.S. 

                                                                              YUM - THE STREET IS GLOWING ABOUT CHINA - YUM China 2Q trends

Howard Penney

Managing Director