October 10, 2013

During the third quarter of fiscal 2013, Yum! Brands, Inc.'s earnings declined by 68% brought about by the food safety scare and the higher-than-expected tax rate.

 

KFC parent Yum Brands Inc. warned that it will take longer than expected for its China restaurant sales to rebound, delaying a recovery in the market that accounts for more than half of the company's overall operating profit. Net income for the quarter ended September 7 fell to US$152 million, equal to US$0.34/share on the common stock, and compared unfavourably to the same period during the previous year when Yum earned US$471 million, equal to US$1.02/share. Sales for the quarter fell 3% to US$3,466 million.

 

KFC China's third-quarter sales and profits were impacted by adverse publicity surrounding a poultry supply incident in December and subsequent news about avian influenza in the region. Same-store sales for KFC China fell 14% during the quarter.

 

The Louisville, Kentucky-based company operates more restaurants in China than any other US brand and said it remains confident in its business in the world's fastest-growing major economy.

 

"KFC is unquestionably the category leader in China and we remain confident sales will fully recover," Chief Executive David Novak said in a statement.

 

Yum attributed its China woes to the December scare, but some analysts suggest that its problems are of a different nature. They say China's middle-income diners - who flock to KFC - have cut their spending due to government austerity measures.

KFC also faces stronger competition from local eateries and the company may have opened too many fried chicken restaurants in China, those analysts said.

 

Yum's China same-restaurant sales fell 11% in the third quarter. Those sales then dropped a steeper-than-expected by 11% in September, which is the first month of the China division's fourth quarter that wraps up at year-end.

The company will launch "an aggressive marketing campaign to fully restore consumer trust in the brand," spokesman Jonathan Blum said. He said trust in the KFC brand has improved in China since last December, but that it wasn't yet fully restored.

 

Thus far, Yum has culled all but its highest-quality suppliers. It also is planning a slew of menu items to drive more sales to KFC restaurants, which account for roughly 4,500 of the company's more than 6,000 restaurants in China.

 

Based on the disappointing sales results from China, and a higher than expected full-year tax rate, Yum now expects an earnings per share decline for 2013 in the high-single to low-double-digit percentage range. It previously had expected a mid-single-digit percentage decline in full-year earnings per share. Both estimates exclude special items. Shares in Yum fell US$5.37 to US$66.30 in extended trading.

Novak said, "Our Pizza Hut business in China continues to deliver strong results, and the rest of Yum is performing generally as expected for the full year. I'm pleased with the strong margin performance in China in the face of significant sales deleverage, along with the fact that Taco Bell has produced seven consecutive quarters of positive same-store sales growth. We remain on the ground floor of global growth and continue to have unparalleled development opportunities."

 

He added that as evidence of the company's development plans, they expect to open at least 700 new units in China this year, as they capitalise on the world's fastest growing consuming class. Outside of China, they expect record new-unit openings for Yum! Restaurants International and in India this year. In total, Yum! will open at least 1,850 new restaurants outside the US, further strengthening their leadership position in emerging markets. In addition, they will have net new-unit growth in the US for the second consecutive year.