Why Investors Are Flying Yum! Brands Coop Once Again
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Why Investors Are Flying Yum! Brands’ Coop Once Again
Yum! Brands stock is crashing
• Poor earnings showed weakness just about everywhere but China.
• U.S. same-store sales at Pizza Hut and Taco Bell either fell from last year or missed analysts’ expectations.
• India, which was identified as a key growth market, saw revenues rise 18%, but only because Yum! opened 25% more stores there. Comps fell 2%.
• A new crisis is unfolding in China…
A new food scandal erupts in China
• Chinese regulators shut down a meat processor for selling meat past its expiration date.
• Supplied meat to both Yum! and McDonald's (NYSE: MCD).
• Local media in China also report use of poor hygiene practices in a local factory.
• Yum! and McDonald's have stopped using the supplier.
Brings back nightmares of two years ago
In 2012 Yum! was caught up in another tainted-meat scandal:
• Its KFC division in China was found to be selling chicken that received excessive levels of antibiotics.
• It was also discovered that the company had known about it for years but did nothing.
Customers flew the coop then, too
• Sales plunged in Yum!'s China division.
• Same-store sales dropped by more than a third at one point in 2013.
• Yum! was also hit by fears of an outbreak of avian flu in China.
A hard-fought battle to regain trust
• It took Yum! Brands over a year to get Chinese consumers to trust its brand again.
• This past quarter revenues surged 21% in China on a 15% jump in comps.
• Because China accounts for more than 60% of revenues and over a third of its operating profits, this latest scandal could be devastating.
China is key to Yum! Brands’ health
Source: Yum! Brands SEC Filings
Impact of new scandal is unknown
• Customers might not be so willing to forgive Yum! a third time.
• It may have significantly damaged its brand this time.
• A half-price bucket of chicken might not be enough to entice consumers to return.
• Apologizing for the "inconvenience" may be seen as halfhearted.
• Weakness in its U.S. earnings was the start of Yum! Brand's most recent decline, but now it has trouble everywhere.
• The sustained turnaround it made in China has likely been undone.
• Management's guidance for 20% earnings growth can no longer be relied upon.
• Yum! Brands has become a globally impaired company.
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