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.
- Foolish takeaway 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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