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Yum Brands (YUM - Analyst Report) posted misses of both the top and bottom line today.  Earnings per share (EPS) was expected to be $0.93, but came in at $0.85, and revenues were expected to be $3.54 billion, but posted $3.47 billion.  Zacks models showed a large decline in analysts’ revisions over the past 60 days, and a potential negative earnings surprise.  Unfortunately, both came true. 

This company produces more than half of their profits from China, and sales in China declined 11% for the quarter.  This is the most crippling news, more damaging than the top and bottom line numbers.  57% of all operating profits are derived from emerging markets and most importantly China.  KFC is the most advertised, and most recognized restaurant brand in China, and YUM has spent a large amount of money on advertising in this country.  Moreover, China was supposed to be the great growth driver through 2015, for the company.   China was planning on expansion plans of more than 20 new city clusters, trade zones, and transportation hubs.  And YUM was planning on purchasing many spots in these new cities.  But given the consistent decline of sales in China, YUM might want to reconsider their massive expansion plans in that country.

To further put pressure on YUM’s management team, analysts are expecting at least modest growth from their direct competitors, McDonalds (MCD - Analyst Report), and Burger King (BKW - Analyst Report).  Another potential long term negative is the Avian Flu epidemic in China, which is causing potential customers to stay away from restaurants (impacting both MCD, and BKW, but not as severely as it is impacting KFC).  It will be interesting to see if the decline in sales was solely due to the Avian Flu epidemic, or if it was a function of customers taste. 

This is the first negative earnings surprise by YUM Brands in over four quarters, but the negative fourth quarter outlook will have analysts revising their expectations within the next few days.  Zacks will have a detailed article out tomorrow.

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