Yum! Brands (YUM, Financial) came out with its fourth quarter 2014 earnings results on February 4. And investors saw nothing different than what they have been seeing in the past several quarters, thanks to the sustained weakness in China. The chicken scandal in this Asian economy has negatively impacted Yum! Brands’ reputation badly, and the company just doesn’t seem to be getting over it. The quick service restaurant chain’s earnings missed analyst estimate, but top line edged above expectation.
Same store sales in China plunged 16% at KFC in the fourth quarter. Though the fall isn’t as steep as the expectation of 19.4%, it’s still huge. The company is in a tough spot right now and is working its ways out to come out of the mess to support future growth. A deeper study of its quarterly number would give a better idea as to where the fast food chain is headed and whether it can create value for investors.
A look into the numbers
The company’s earnings per share in the fourth quarter declined by a whopping 29% to $0.61 compared with last year. Analyst had estimated earnings to come in around $0.66 per share. For the full year Yum! was able to register an EPS growth of 4%.
The company’s quarterly revenue dropped to $4 billion in comparison to a year ago figure of $4.18 billion, but it was better than consensus estimate of $3.97 billion. Revenue from its largest market China, dropped 11% in the last quarter. But for the full year, the company’s top line surged 3% as the menu revamp in the first half of 2014 showcased strong results in China. But then, right after the company got involved in another round of chicken scandal that did the damage in the remaining half of the year. At the earnings call, Yum!’s CEO Greg Creed said:
“Our goal is to continue to build free global iconic brand that people trust and champion. I believe that's critical to delivering sustained growth…”
And quite so. China being Yum!’s most important market as it draws more than half its revenue from here, the company needs to fix its image big time.
Not giving up on China
Yum!’s chicken scandal roots go back to 2012 when it was charged of using chicken with excess level of antibiotics. Since then, Yum! hasn’t really recovered to the earlier level as consumer confidence in the American brand dropped drastically.
And in 2014, just when the company started tasting some success from the menu revamp, in July the Shanghai Husi episode happened. Even McDonald’s (MCD, Financial) has fallen prey to the same incident, but it’s not impacted the company as severely as it did to Yum!. This is attributable to Yum!’s massive exposure to the Chinese market.
Despite the headwinds, the company believes that current challenges are transitory. This can be evidenced by the remarkable improvement that Yum! saw in the first half of the year. Its operating income spiked by a stunning 116% and EPS went up 27% during this period. The company was sure to register a 20% EPS growth for the full year. However, Shanghai Husi supplier incident put a break again. But the company is in no way looking to curb its expansion plan. For 2015, the restaurant chain has plans to build 700 new outlets in the country. Besides, Yum! is confident to see a turnaround this year and report an EPS growth of at least 10%.
Even in the home market, the company is facing challenges with stagnating sales as Pizza Hut and KFC are losing traction with health conscious customers. But Taco Bell remains a bright spot with 3% improvement in comps sales both in the domestic and international market. The company is spending on marketing and rebranding to pull up sales in the U.S, which happens to be its second most lucrative market.
What next?
With things not going in favor of Yum! in its top two market, the scenario looks challenging. But again, we all know that when all was going fine, China’s showered immense love on Yum!’s KFCs and Pizza Huts. So it’s just a matter of time for Yum! to see days of glory in China back again. It isn’t easy though – the company would have to keep a tight check on its supply chain to prevent such untoward incidents. This will help improve the falling comp sales in China. And as far as its domestic market is concerned, a big makeover of menu could do the trick and help change its image of a fast food chain.
