Another slight step backward in same-store sales for Yum! Brands Inc.’s China division has several securities analysts casting new doubts that the company can hit the recovery to positive comparable sales in China that it has repeatedly projected for the fourth quarter.
In a filing with the Securities and Exchange Commission Friday, Louisville, Ky.-based Yum disclosed that same-store sales in its Chinese division of nearly 6,000 restaurants decreased 10 percent for the month of August, an improvement from the division’s 13-percent decline for July but slightly worse than analysts’ expectations.
The August result included a 12-percent decrease for its KFC brand, offset by a 5-percent increase for Pizza Hut Casual Dining. In the prior month, same-store sales had fallen 16 percent at KFC and had grown 3 percent at Pizza Hut.
Yum also disclosed that for the third quarter, its China division recorded a same-store sales decline of 11 percent, comprising a 14-percent decrease at KFC and a 4-percent gain at Pizza Hut Casual Dining. Same-store sales fell 20 percent in both the first and second quarters of 2013 in China, Yum previously reported.
David Tarantino of Robert W. Baird & Co. wrote in a research note that Yum faces a relatively easy comparison with last year’s fourth quarter, when the start of a poultry supply controversy caused the China division’s same-store sales to decrease 6 percent. However, factors outside Yum’s control, like greater pressure on Chinese consumers, could throw Yum’s recovery timetable in doubt as much as lingering effects of the supply issue, he added.
“While Yum continues to expect China comps to be positive in the fourth quarter amid easier comparisons and planned initiatives,” he wrote, “we think visibility to the near-term outlook remains somewhat low following the choppy demand pattern and mixed macroeconomic indicators seen in recent months.”
In a separate note, Bryan Elliott of Raymond James & Associates wrote that it might prove too difficult to achieve the sequential same-store sales improvement investors expect in order to hit Yum’s projected increase for the fourth quarter. The consensus view, he noted, was that Yum’s China division would achieve flat same-store sales by October and increases in the mid-single digits and mid-teens by November and December, respectively.
“Investors have been willing to give the company ‘a pass’ on soft monthly comps and share management’s confidence that China comps will turn positive in the fourth quarter and recover strongly in 2014,” Elliott wrote. “Said ‘pass’ is approaching its expiration date as the company laps progressively easier year-over-year comparisons through the fourth quarter. We continue to believe the consensus bull case for a full recovery in 2014, with strong double-digit comps in the first half, could prove optimistic.”
A shaky recovery
Since December 2012, sales in the company’s once high-flying China division have cratered as a result of negative publicity surrounding poultry suppliers in China, including a few small former suppliers of KFC who were implicated in a state television report exposing the use of antibiotics in Chinese poultry farming.
Yum responded with a major quality assurance campaign in China, and while same-store sales have mostly improved from decreases of 41 percent at KFC and 15 percent at Pizza Hut in January, the recovery has not been linear. The division’s same-store sales slipped sequentially from down 13 percent in March to down 29 percent in April, as new fears of an avian-flu outbreak in China temporarily derailed KFC’s progress toward recovery.
July’s sales were another slight hiccup, decreasing 13 percent after June’s same-store sales decline had narrowed to down just 10 percent compared with the prior year. While August’s performance was a sequential improvement, analysts noted that Wall Street expected a decline of about 8 percent, obscuring just how likely it is that Yum could effect a quarterly increase in same-store sales by the fourth quarter of this year.
In a research note, Jefferies Equity Research analyst Andy Barish pointed out that, in addition to the staying power of bad publicity over the poultry supply, Yum must also combat increased competition and “more volatile Chinese consumer spending trends.”
“While we do believe concerns related to last year’s bad publicity are diminishing,” Barish wrote, “we do not get the sense that the company has much control over the trajectory of the recovery…. Consumers are more cautious about their future earnings power and therefore more discerning with their dollars, while local and overseas restaurant chains continue to expand rapidly through the country.”
Yum plans to host investors and securities analysts for meetings in Shanghai Sept. 9 and 10.
In addition to KFC and Pizza Hut, Yum also operates and franchises Taco Bell in the United States and around the world. The company has more than 39,000 restaurants in more than 120 countries.