YUM Fried As China Same-Store-Sales Crash; Expects EPS Decline In 2013

Tyler Durden's picture

While it was relatively well-known (or expected) that YUM's China business was hurting (after its PR snafu), this is considerably worse than expected (hoped for). Revenues and earning met considerably lowered expectations but the outlook is drastically slashed:

  • *YUM!: PUBLICITY STILL SIGNIFICANTLY HURTING CHINA KFC SALES
  • *YUM SEES CHINA COMP SALES JAN AND FEB COMBINED DOWN 25% :YUM US
  • *YUM! SAYS CHINA DIVISION JAN. EST. COMP SALES FELL 37% :YUM US

which leaves them

  • *YUM SEES YR ADJ. EPS DOWN MID-SINGLE DIGITS VS $3.25, EST $3.57

But there's always hope...

  • *YUM! SEES KFC CHINA COMP SALES POSITIVE IN 4Q :YUM US

The stock is down 8% after-hours (for now).

 

The question is - of course - WWJCD - "I think the bulls are right and the bears are letting a short-term Chinese speed-bump scare them away from a great story" It was $67.52 then...$61.00 now

And from the Press Release:

CHINA UPDATE

 

KFC sales in the last two weeks of the fourth quarter were significantly impacted by the intense media attention surrounding an investigation by the Shanghai FDA (SFDA) into poultry supply management at Yum! China. The investigation was prompted by a report broadcast on China’s national television (CCTV), which aired on December 18, 2012. The report showed that a few poultry farmers were ignoring laws and regulations by using excessive levels of antibiotics in chicken. Regrettably, some of this product was purchased by two poultry suppliers of KFC China. The investigation caused further media attention, including social media commentary, and this negatively affected consumer perceptions of poultry safety, and KFC in particular.

 

On January 25, 2013, the SFDA concluded its investigation and released its recommendations. We appreciate their thorough and diligent review. The SFDA identified issues and provided “Supervisory Recommendations” to Yum! China to strengthen our poultry supply chain practices including refined voluntary self testing procedures, improved reporting and communications and enhanced supplier management. Our team in China has taken a comprehensive review of our current system and is in the process of incorporating all of the SFDA’s recommendations. We have always recognized the importance of building a world-class supply chain in China, which is why we have implemented a wide range of quality assurance and testing practices over the years above legal and regulatory standards. The SFDA’s recommendations will further strengthen those practices. The SFDA did not bring a case against Yum! China and no fine was assessed.

The past seven weeks of media attention have been intense and negative towards the KFC brand image. Even though this is a very disappointing setback, we are more committed than ever to continue to strengthen our efforts, restore the confidence of our customers and win back their brand loyalty. To that end, the China team will soon be launching a brand reputation quality campaign to re-assure consumers of our high quality food, along with aggressive marketing plans.

 

2013 OUTLOOK

 

We are confident the YRI and U.S. businesses will deliver annual operating profit growth consistent with our ongoing growth model. Given current uncertainties related to KFC sales in China, it is difficult to confidently forecast our overall financial performance. We have made the assumption that KFC China same-store sales will improve as the year progresses and will be positive in the fourth quarter. With these assumptions, we estimate a mid-single digit EPS decline in 2013 versus prior year, excluding Special Items. This includes an expectation for a significant decline in EPS performance in the first half of the year followed by EPS growth in the second half.

 

The first quarter for our China business includes only the months of January and February and is highly impacted by consumer spending during the Chinese New Year holiday. The timing of this holiday changes each year. This year it is important to note that while the timing impact of Chinese New Year is neutral to our first quarter, there is a significant negative impact to January sales and a corresponding significant benefit to February sales due to the timing of this week-long holiday. We expect that the underlying performance of our China business will remain relatively unchanged for the balance of the first quarter, with a same-store sales decline of approximately 25% for January and February combined (China’s first quarter).

and from the CEO:

Although we cannot predict how long it will take to restore sales, we are steadfast in our belief that the power and popularity of the KFC brand in China will ultimately drive a full sales recovery.