It is said that those who don’t learn from history are doomed to repeat it. The latest one to do it? Yum! Brands (YUM, Financial). Early this summer, the news broke out that one of the company’s suppliers had been providing expired meat. The parent company of KFC, Taco Bell and Pizza Hut has been in a similar situation before. If we remember, towards the end of 2012, Chinese food investigators found that the company’s suppliers had sold to KFC and Pizza Hut food materials which contained higher-than-permitted levels of antibiotics. The going has been slightly rocky for the company ever since. This affected the company’s sales, particularly in China. For the record, in the first quarter of 2013, Yum! same-store sales declined 20% in China.
The latest crisis which reared its ugly head came in July this year. In its third-quarter earnings report, released Tuesday, Yum! saw a 14 percent same-store sales decline and an almost 10 percent drop in revenue in China. The company reported lower-than-expected profit and revenue, and now expects annual earnings-per-share growth of 6 to 10 percent, down from a previous projection of at least 20 percent.
Management comments
Yum! Brands CEO David Novak said the company was relatively early in its recovery and that it will take six to nine months to rebound from the events in China. "No two crises are ever the same," he said, in response to a question on Yum!'s 2014 and 2012 chicken-supplier scandals. This time around, Yum! says it was able to take swifter action. The fast-food conglomerate responded especially speedily to social media outcry. "I can't say we'll never have an incident like this again," Novak said in the call. "But I can say we get stronger."
The company’s performance In China
Yum! started the year off on a high in China. The company had a decent, if not a smashing, start in China. The year started off with two very strong quarters for the company. The company had also announced plans to open at least 700 restaurants there this year. The company also saw China’s rapidly growing middle class and a supersized economy as rather an opportunity to make it huge in the Chinese market.
The latest food scandal in China, though, is still hurting Yum! Brands’ results despite the company having little exposure to the supplier that was selling bad meat. Consumers either don’t know that or don’t care.
This scandal has rather made Yum!’s offerings –Â KFC, Taco Bell and Pizza Hut – much less palatable in the company’s largest market, and that derailed the company’s bottom line and full-year forecast. For the most recent quarter, Yum! Brands' earnings on a net basis rose to $404 million, or 89 cents per share, from $152 million, or 33 cents a share, a year ago. The disappointing quarter was the result of slumping revenue and same-store sales in China. Chinese same-store sales –Â a key measure of a retailer’s health –Â plunged 14% in the most recent quarter. Meanwhile, Yum Brands’ total revenue fell slipped 3.2% to $3.35 billion.
To conclude
As of the middle of July, Yum! stock was up 10% in 2014. Since then, shares have lost more than 15% to leave them down nearly 8% on the year so far. Courtesy –Â the scandal in China. The company had started off the year on a very high note. The going was great in the market. In fact, if it weren’t for the scandal, the company would have established a formidable standing in the Chinese market. The stock fetches 18 times forward earnings, which is reasonable considering it has a growth rate of more than 14% per year. I would still rate the stock a buy as this scandal does not seem to be having a very long-term impact on the stock. It is only a matter of time before the company would bounce back and regain its positon.
