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China woes smack Yum Brands

Yum Brands (YUM), the parent of Taco Bell, KFC, Pizza Hut, today reported worse-than-expected quarterly results and lowered its full-year outlook. It said its problems in China, where the company operates nearly 7,000 restaurants, overshadowed strength elsewhere.

Shares of the restaurant operator plunged 17.3 percent, or $14.41, to $69.04 in after-hours trading on Tuesday.

In China, Yum said the "pace of recovery ... is below our expectations." Division sales there rose 8 percent and gained 2 percent on a same-store basis (a metric of sales at stores open one year or more).

But Wall Street had been betting CEO Greg Creed would do a lot better in turning around Yum's China business, which had been dogged in recent years by concerns about the quality of its food. Creed had earlier said the company's business in the world's most populous country was "back on track."

Net income for the quarter ending in September rose 4 percent to $421 million, or 95 cents per share, versus $404 million, or 89 cents per share, a year earlier. Revenue at the Louisville-based company rose 2 percent to $3.42 billion.

Excluding one-time items, earnings were $1 per share, below the $1.07 analysts had forecast. The revenue figure also lagged the $3.68 billion consensus forecast.

"Given our lower full-year expectations in China, combined with additional foreign exchange impact, we now expect 2015 (earnings per share) growth to be well below our target of at least 10 percent," Yum said in a statement.

That's obviously not going down well on Wall Street.

Yum's performance may heighten many investors' anxiety regarding the slowdown in China's economy. Beijing reported GDP growth of 7 percent in the second quarter. Officials at the International Monetary Fund have forecast 2015 growth of 6.5 percent to 7 percent, edging back to 6 percent to 6.5 percent next year.

Taco Bell, which operates 6,527 restaurants, was a bright spot for Yum as its same-store sales rose 4 percent. Operating profit jumped 6 percent to $132 million. The chain generated 15.8 percent of Yum's revenue and 24 percent of its operating profits in the first half of the year.

Some investors are pushing the company to spin off Taco Bell into a separate company.

"We believe that there would be a built-in constituency for a separately and publicly traded Taco Bell stock," wrote Nomura Securities analyst Mark Kalinowski in a recent note to clients. "Some investors who like the Taco Bell concept have not invested because of Yum! Brands' China-related risks. Furthermore, it is possible that KFC and Pizza Hut might be better managed if those were the only two big brands in the Yum! portfolio."

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