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Yum Brands shares are going to do as well, in the long term, as its restaurants do in China. Roughly half its profit comes from China, and the company is opening a huge number of Kentucky Fried Chicken and Pizza Hut stores there – 889 in 2012, a 17 per cent increase. Until recently, it has expanded Chinese same-store sales nicely too. If Yum can keep this up, its sluggish US operations become less important and its prospects in other emerging markets, such as India, more exciting.
A government inquiry into the safety of Yum’s poultry supply chain, and the accompanying bad publicity, drove same-store sales in China down 6 per cent in the fourth quarter, which was reported on Monday evening. This is not too worrisome in itself. Restaurants with strong brands can overcome quality problems. Same-store sales growth had been slowing before the inquiry, however. Back in the third quarter, all the same-store growth was from price increases; volumes were down. A slowing economy could explain this. But Yum’s returns on capital are so high in China – it says its cash returns on a new restaurant can reach 50 per cent a year – that one must wonder when competition will ramp up.
These anxieties will only be increased by the company’s new 2013 profit outlook. Management said it could not reliably predict how long it would take Chinese sales to recover but, on the assumption that same-store sales growth returned in the fourth quarter, earnings per share would fall in 2013. It is hard to read this as a confident statement about either the end of the supply chain scandal or the firmness of the underlying market. Yum’s shares fell 9 per cent in the regular trading session and after hours on Monday, and look to be stalled until the China situation becomes much clearer than it is today.
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