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Yum Brands’ investors wavering as China sales drop

KFC restaurants in China saw a 16-per-cent drop in revenue for July, 2013.

ALY SONG/REUTERS

Investors are losing their appetite for Yum Brands Inc. stock amid concerns about the company's slumping sales in China, a crucial market for its fast-food offerings.

Shares in the company behind the KFC, Taco Bell and Pizza Hut restaurant chains fell by more than 3 per cent during trading on Tuesday, after it reported worse-than-feared same-store sales in July.

Yum Brands has long been touted as one of the biggest success stories among North American companies that have tried to tap into the emerging Chinese consumer. Thanks largely to the enormous popularity of KFC in China, the Asian nation accounted for more than half of Yum's $13.5-billion (U.S.) in revenues in 2012.

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While some analysts see the stock's drop as temporary, as the company tries to recover from the double blow of a contaminated chicken scandal and avian flu scare, others see it as part of a larger trend of changing tastes and belt-tightening in the world's second-largest economy.

"We think the miss confirms the risk of increased competition and a more cautious Chinese consumer," Jeffries analyst Andy Barish said in a note.

Yum Brands said late Monday that its July same-store sales fell 13 per cent in its China division, a result much worse than analysts had forecast. That included a 16-per-cent drop at its KFC restaurants in China and a 3-per-cent gain at Pizza Hut.

The company's same-store sales in China have been in a swoon, falling 10 per cent in June, 19 per cent in May and 29 per cent in April.

The company, based in Louisville, Ky., continues to forecast a recovery of same-store sales this year, with figures turning positive in the fourth quarter. However, investors are growing concerned that turnaround may not happen if China's economy slows further and consumers continue to shun KFC.

"Although it's tough to read monthly trends, July may suggest the turn is taking longer than expected, and we think a dramatic rebound [in Yum's same-store sales] … next year is unlikely," Mr. Barish said.

A report on Chinese consumers from McKinsey & Co. shows that, while discretionary spending on dining out is expected to increase by 10 per cent annually over the next decade, the greatest gain will come from the more affluent population, not the value-conscious consumers more likely to eat at KFC.

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"Although all consumers will increase their spending, the gaps between different income groups will widen significantly. Stark disparities in standards of living are emerging in China," the report says.

Yum Brands shares closed at $72.97 on the New York Stock Exchange on Tuesday, down 2 per cent on the day. The stock is down 9.9 per cent so far this year, although it has recovered somewhat after falling to a 52-week low of around $60 in February, after the company warned it would post a mid-single-digit decline in earnings per share in 2013.

Yum Brands took a public relations hit in China after excessive levels of antibiotics were found in a small portion of the company's chicken supply.

While the company has taken steps to ensure the practice isn't repeated, sales at its KFC locations have yet to recover. An avian flu scare in March has also kept customers away.

Bruce Campbell, president of Campbell Lee & Ross Investment Management Inc., says he bought some Yum Brands shares when they were in the low $60-range, and is considering selling if the August numbers don't show some improvement.

"I would take my profit and run if it doesn't turn in a month," Mr. Campbell said.

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Still, some analysts and fund managers believe Yum Brands is fixing the problem and is well diversified as it enters other international markets, such as India, Indonesia, Malaysia, Vietnam, the Philippines.

"We've long believed the company's same-store sales recovery in China was likely to be uneven [especially considering macro-economic pressures in the region]," Morningstar Inc. analyst R.J. Hottovy said.

"We'd prefer a bit more of a pullback before recommending shares, but we still view Yum as one of the more compelling global growth opportunities in the consumer space right now."

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About the Author
Contributor

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More

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