What Happened:

Shares of fast-food company Yum China (NYSE:YUMC) fell 11.5% in the mid-day session after the company reported third quarter results with revenue, gross margin, and EPS all falling below Wall Street's estimates. These misses were driven by its lower-than-expected same-store sales growth, which is usually higher margin revenue than sales from new restaurants. Investors are likely concerned about the decelerating same-store sales because of the company's rapid restaurant expansion strategy - typically, higher same-store sales are what justify new locations. In addition, the company highlighted foreign exchange headwinds, which had a negative impact of approximately 6% in the quarter. Looking ahead, management provided weak guidance for the fourth quarter. It highlighted softening demand observed since late September, which is expected to affect sales and, consequently, margins. Overall, this was a weaker quarter for Yum China.

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What is the market telling us:

Yum China's shares are not very volatile than the market average and over the last year have had only 7 moves greater than 5%. Moves this big are very rare for Yum China and that is indicating to us that this news had a significant impact on the market's perception of the business.

Yum China is down 22.1% since the beginning of the year, and at $43.98 per share it is trading 31.7% below its 52-week high of $64.36 from April 2023. Investors who bought $1,000 worth of Yum China's shares 5 years ago would now be looking at an investment worth $1,230.

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