Yum! Brands (YUM, Financial) has been undergoing a difficult phase, wherein negative publicity in China has resulted in a fall of 15.3% in share price. Its recently reported quarterly numbers were also disheartening, as the results were significantly below Street’s expectations. This further added to investors’ disappointment.
Analyzing the quarter
Weakness in China resulted in a decline of 3.2% in revenue, clocking in at $3.35 billion. On the other hand, analysts were expecting it to be at $3.45 billion. The biggest setback for the company was its Shanghai supplier’s improper food handling practices, which scared away customers from having food at Pizza Hut and KFC outlets in China. The food supplier was using expired meat and mixing it with the fresh ones in order to save costs. Although OSI Group is not a major supplier of meat for the company, this news made customers apprehensive.
Thus, people in China avoided Yum! Brands’ restaurants. This resulted in a same store sales decline of 14% in the region. The comparable sales at KFC and Pizza Hut dropped 14% and 11%, respectively. Also, system sales fell 9.5% during the quarter to $1.84 billion.
However, if we exclude China’s performance, the food company actually performed well. System sales at Pizza Hut were flat, but sales at KFC outlets jumped 6% over last year. In fact, same store sales in the emerging markets, developed markets and the U.S. rose 4%, 3% and 2%, respectively. Also, sales in India surged 14% during the period.
Further insights
The best performing segment was the Taco Bell division. Taco Bell is mainly placed in the U.S., and great demand for its products in this region helped revenue grow. System sales jumped 4% for Taco Bell, and this growth was mainly driven by the new breakfast menu introduced by the division. Breakfast segment has become quite popular in the U.S. as people want to have a healthy breakfast that takes less time to eat. In fact, breakfast sales led to a 3% growth in sales. Thus, this segment is something to look forward to.
Further, Yum! Brands did a great job of managing its costs. Adjusted earnings increased to $0.87 per share from $0.85 per share in the previous year’s quarter. However, it was still below the estimate of $0.88 per share.
The road ahead
Although Yum! Brands is suffering from lower sales due to food quality issues, it continues with its efforts to grow. It opened its first KFC store in Brazil and the first Pizza Hut outlet in Africa. Also, it plans to open 700 new restaurants in China by next year. These measures make Yum! an interesting company. Also, the company declared dividend for the quarter.
Nonetheless, a lowered outlook disappointed investors. It now expects growth in the bottom line of 6% to 10%. This is much lower than the previous estimate of 20% growth. Also, same store sales in China will continue to put pressure on the overall performance.
The bottom line
Although Yum! Brands had a big setback due to the food scandal, it is making efforts to recover from the damages. It plans to grow through significant efforts into opening new stores and expanding into new regions. It plans to focus on the emerging markets and the breakfast offerings, which is resonating well with the customers. Nonetheless, a lowered outlook indicates lacklustre performance in the near future. Thus, investors should wait for the right opportunity to put their money in this company.
