Wall Street turns on Yum Brands
The company made a huge bet in China. But its reputation there suffered amid suspected links to unscrupulous chicken farmers.
Shares of the owner of Pizza Hut, KFC and Taco Bell fell nearly 4% Tuesday following Monday's disappointing earnings report. For a closer look at the earnings, click here. My colleague Jim Jubak opined on the earnings here.
Wall Street is especially worried about Yum's businesses in China, where the company owns 5,000 restaurants in 800 cities, most of them KFCs. The company's reputation for quality food at a low price has taken a hit in the world's most populous country amid media reports that its poultry suppliers did business with farmers who feed their flocks excessive levels of antibiotics. Yum gets more than half of its sales and operating profit from China.
As Reuters notes, Yum wasn't fined by regulators, but the company's reputation was pilloried on social media sites. The impact of this negative publicity was devastating. Same-store sales, a key metric for locations opened at least a year, fell 37% in China overall in January. They plunged 41% at KFC and 15% at Pizza Hut Casual Dining. China same-store sales will rebound in the fourth quarter, according to the company.
The pain in China isn't ending anytime soon. Same-store sales are expected to fall by 25% in January and February. Not surprisingly, Yum Brands expects a significant decline in earnings performance in the first half of the year and no longer expects earnings growth in 2012. That's a huge disappointment since Yum had expected 2013 earnings-per-share growth of at least 10%.
Yum hasn't thrown in the towel on China. The company has apologized for its food handling mistakes and has launched a marketing campaign to bolster its KFC brand in China.
--Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.
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[BRIEFING.COM] S&P futures vs fair value: -4.30. Nasdaq futures vs fair value: -8.50. Equity futures moved up in reaction to the latest durable orders data. However, the S&P 500 futures continue to trade lower by 0.3%.
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