Success in China made Yum! Brands, the parent company of Pizza Hut, one hedge fund manager's top pick at this year's Sohn Conference.
Courtesy of Pizza Hut

Same-store sales in China were down 14% as customers there continue to avoid Yum's chains after meat supplier scandal over the summer.

By Tom Huddleston, Jr.
October 7, 2014

What you need to know: Yum Brands lowered its earnings growth forecast for the year after reporting worse-than expected sales numbers for its third quarter following a food scandal in China in which a supplier re-labeled meat that had passed its expiration date. The company, which operates the KFC, Pizza Hut and Taco Bell fast food chains worldwide, said it had $3.35 billion in quarterly revenue, down 3.2% from the same period last year and below analyst estimates of $3.46 billion. Yum also said it had $404 million in profits, up from $152 million for the same quarter in 2013.

The company’s sales decline was driven by a dip in its China business following the revelations over its food quality that caused Chinese customers to avoid its restaurants. The company expects its China sales will improve somewhat in the fourth quarter, but said they will remain in the red. As a result, Yum YUM revised its earnings per share growth estimates for the full year to between 6% and 10% after previously predicting growth of at least 20%.

Yum’s shares gained 0.4% in after-hours trading after falling 2.3% during the day on Tuesday.

The big number: 14% – that’s how much same-store sales in China declined for Yum Brands, slightly more than the forecasted 13% decline analysts had predicted ahead of Tuesday’s report. The steep drop-off came after a report revealed improper food-handling practices by Yum’s Chinese supplier, Shanghai Fusi. As a result of the ensuing scandal, which also ensnared McDonald’s, Yum cut ties with Shanghai Fusi’s U.S. parent company, meat supplier Osi Group. (For McDonald’s, the China scandal is also expected to put a major dent on sales at the fast food chain’s Japanese unit.)

Same-store sales at KFC locations in China dropped 14% in the company’s third quarter and 11% at Pizza Hut stores in the country.

Yum Brands addressed the scandal’s impact on China sales, saying in a press release, “In our experience, sales typically take six to nine months to recover from these types of events.”

CEO David Novak gave a positive spin to the company’s troubles in China and highlighted plans to open more restaurants there.

“China sales are on the path to recovery and we expect to develop at least 700 new restaurants in China this year, which we’re confident will ultimately deliver high returns as we further capitalize on the world’s fastest growing consuming class,” he said in a statement.

What you might have missed: Yum’s Taco Bell stores, which are mostly located in the U.S., reported a 3% bump in same-store domestic sales during the quarter. The company attributed the increase to the chain’s new breakfast menu, which debuted earlier this year with items including steak and egg burritos and a waffle taco. With the new menu items, Taco Bell is among the chains making a push into the breakfast space that has mostly been dominated by McDonald’s. Novak said in his statement that the Taco Bell breakfast options offer Yum “a new growth platform to build upon in the years to come.”

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