What:Shares ofYum! Brands fell 11.3% in the month of October,according toS&P Capital IQdata, driven primarily by the fast-food giant's disappointing third-quarter 2015 results. Despite a brief rebound after Yum! Brands announced the spinoff of its China business later in the month, shares now sit around 5% lower than they started the year:
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So what: Yum! Brands' quarterly revenue rose 2.2% to $3.43 billion, and translated to a 14% increase in adjusted earnings to $1.00 per share. Unfortunately, analysts were more optimistic on both fronts, with consensus estimates calling for revenue and earnings of $3.68 billion and $1.07 per share, respectively.
The primary cause of its underperformance was a slower-than-expected recovery in China, where system sales rose 8% driven almost entirely by incremental sales from new restaurants. Meanwhile, Yum!'s KFC chain saw same-store sales rise a modest 3%, while Pizza Hut Casual Dining saw same-store sales decline 1%. For perspective, both chains first began to suffer in China just over a year ago amid adverse publicity surrounding food handling practices of a (now-former) small supplier.
Yum! CFO Pat Grismer elaborated during this quarter's conference call that both chains are fighting against a combination of macro-economic and currency headwinds, a "significant impact of online ordering aggregators entering the casual dining space" in the country, and marketing missteps that wrongly positioned Pizza Hut, in particular, at premium price points when diners are increasingly seeking value.
To Yum! Brands' credit, Taco Bell division system sales rose 7%, helped by 3% unit growth and 4% same-store sales growth. And KFC sales outside of China rose 6%, similarly driven by 3% unit growth and 3% same-store sales growth. Meanwhile, Pizza Hut outside of China remains in turnaround mode, as sales grew a more modest 2%, comprised of 2% unit growth and 1% same-store sales growth.
Now what: Subsequent to Yum!'s quarterly report, the company announced its intention to separate into two publicly traded companies.
First, Yum! China, which it notes has the potential to grow to at least 20,000 restaurants over the long term from "just" 6,900 locations today. If Yum! can manage to continue making progress -- however slow -- in China, this could be a compelling opportunity.
And second will be Yum! Brands, comprised of KFC, Pizza Hut, and Taco Bell outside of China. More specifically, thenewYum! Brands will maintain a goal of becoming "more of a 'pure play' franchisor," with at least 95% of its locations owned and operated by franchisees by the end of 2017. As it stands, Yum! Brands has 41,000 restaurants around the globe and is adding around 2,000 more each year.
Perhaps most pertinent to investors going forward is that this separation is planned to be completed by the end of 2016, and management promised to discuss the transition in more detail during the company's upcoming analyst day on December 10, 2015. If you can be sure of one thing, it's that investors would be wise to listen closely at that point to gauge the potential of this separation to create shareholder value over the long term.
The article Why Yum Brands, Inc. Stock Dropped 11.3% in October originally appeared on Fool.com.
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