November 30, 2012 / 5:40 PM / 5 years ago

Yum's shares tumble after China sales warning

LOS ANGELES (Reuters) - Shares of Yum Brands Inc (YUM.N) tumbled 9.5 percent on Friday after the parent of the KFC, Pizza Hut and Taco Bell chains warned that sales at established restaurants in China, the company’s biggest market, would fall in the fourth quarter.

The company, which got more than half its third-quarter revenue and operating profit from China, now expects sales at restaurants open a least one year to fall 4 percent this quarter. Analysts were expecting a gain of around 2.5 percent and Yum previously had forecast sales to be flat to up in the low single-digit percentages.

The sales surprise from Yum, the largest Western restaurant operator in the China, landed as economic growth in that country cools. It prompted some Wall Street analysts to downgrade shares of the company, which once seemed insulated from China’s economic woes.

Some analysts expect visits to Yum’s roughly 4,800 China restaurants to drop sharply in the fourth quarter.

“Traffic appears to have fallen 9 percent,” Susquehanna analyst Rachael Rothman said in a client note in which she downgraded Yum shares to “neutral” from “positive” and cut her stock price target to $69 from $76.

Yum faces the daunting task of posting growth on top of the 21 percent same-restaurant sales gain from the fourth quarter of last year. “Value oriented competition” in China also appears to be taking a toll, Rothman said.

J.P. Morgan analyst John Ivankoe said China slowed “significantly” following the Golden Week holiday in early October. That trend appeared to continue into November, affecting all regions and times of day, he said.

“The slowdown has clearly weighed on the business and competition, but indications seem to be that things aren’t getting worse,” Ivankoe said in a client note.

The slowdown also appears to have hit Yum rivals such as McDonald’s Corp (MCD.N), Ajisen (China) Holdings (0538.HK), and Hop Hing Group Holdings Ltd (0047.HK), said Phoebe Tse, a Hong Kong-based analyst with Barclays.

    Ajisen is a Japanese-style noodle chain, while Hop Hing’s fast food unit has the franchise licenses for the Yoshinoya beef bowl and Dairy Queen ice cream shops in northern China.

    Tse said the deceleration has been “quite apparent” in some of China’s major cities, which include Shanghai, Beijing and Guangzhou.

    Yum has broad geographic reach in China, where a growing middle class is attracted to Western brands.

    While China remains the world’s fastest-growing major economy, American companies ranging from jeweler Tiffany & Co (TIF.N) to blue jeans seller Levi Strauss & Co previously have signaled a slowdown there.

    Shares of Yum, which hit a high of $74.74 on November 29, were down $7.06 at $67.41 in midday trading on the New York Stock Exchange.

    Additional reporting by Melissa Lee in Shanghai; Editing by Steve Orlofsky

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