Yum China Holdings Inc.'s belly isn't full yet.
Shares in the operator of the KFC and Pizza Hut restaurant chains in China fell 5 percent in after-hours trading in New York on Wednesday after second-quarter revenue narrowly missed forecasts. Investors counting on Yum China as a bellwether to judge China's consumer growth story shouldn't be too alarmed, though. You can place this response right in the overreaction basket for now.
Part of the sudden share drop can be explained by profit-taking: Shares in Yum China are up more than 50 percent since splitting off from its parent company last November.
But it's also likely that investors freaked out after bidding up expectations in recent months well past realistic targets.
Other metrics, including earnings per share and sales growth at established restaurants (typically the most closely watched figure in the industry), handily beat already lofty forecasts.
Investors sitting down to feast on Yum China should pace themselves. Sure, there will be fits and starts, but the long-term growth story is there.
Unlike in the U.S., where there's little demand to open additional locations in an overly saturated restaurant market, China remains underpenetrated. That's especially true for lower-tier cities, as my colleague Shuli Ren wrote earlier this week. Yum China opened 90 new restaurants and remodeled another 197 in the last quarter, with plenty more locations to come.
It's also being smart and fast about rolling out digital payments, delivery, and loyalty programs -- three of the most important growth drivers in today's competitive restaurant industry. Its recently acquired controlling stake in Daojia, an online food delivery platform, will help accelerate efforts on that front.
Rising wages and commodity costs are certainly a headwind. And it was disappointing that Yum China's greatest laggard, Pizza Hut, posted flat sales this quarter compared to a year ago, especially since comparable-store sales at the chain rose 2 percent last quarter from the year before. But I'm willing to give the company the benefit of the doubt, as it works out all the kinks necessary to turn around the pizza chain and get input costs chainwide under control.
It makes sense for Yum China investors to want a mid-meal palate cleanser. But they're going to want to come back to the table for further courses.
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