As China’s growing economy shift to being consumer-driven from being export-driven, companies exposed to discretionary spending have boomed.One of the big winners in this evolution has been Yum! Brands, who’s KFC restaurants are a popular destination for hungry Chinese consumers.
That’s why yesterday’s Yum! Brands guidance was such a disappointment. From Morgan Stanley’s John Glass:
China comps slow unexpectedly. YUM offered its standard 13 guidance and business update ahead of its annual analyst meeting next week. All was in line but for one important negative twist: 4Q China comps will likely be down 4% (note: lapping a +21%, not an inconsequential fact & toughest lap of yr), this versus our +2% estimate. While we don’t see this as reason to abandon the name wholesale, it raises new questions on pace of openings, pricing and overall consumer macro stability there.
What happened in China? Sales slowed during Golden Week (early October) but didn’t recover, as management thought they might when they last updated guidance. With average pricing running 4-5% this Q (started at 7% but 4% rolls off intra-quarter), this implies a HSD decline in traffic. Sales have stayed at these lower levels throughout the quarter and cut across all geographies and all brands. We’d conclude from this that the issue is likely broader than YUM specifically.
Hopefully this is an isolated story as most of the macro data out of China has reflected the budding green shoots of a re-acceleerating economy.