What is in this article?:
- Analyst â€˜increasingly confidentâ€™ in Yum recovery in 2014
- Realigned for growth elsewhere
An industry analyst noted that Yum’s weakness in China this year was specific to its flagship KFC brand
Plummeting sales in China made 2013 a year to forget for Yum! Brands Inc., but at least one securities analyst is “increasingly confident” that the quick-service giant’s same-store sales and stock price will recover next year.
Sara Senatore, the restaurant industry analyst for Bernstein Research, upgraded the New York-based firm’s rating of Yum’s stock to “outperform,” from a previous classification of “market perform,” in a research note published this week that pointed to a strengthening Chinese market and Yum’s recent corporate realignment.
She noted that Yum’s weakness in China this year was specific to its flagship KFC brand, which dealt with negative publicity for the country’s supply of chicken and new fears of avian flu, making KFC’s troubles more transient than structural in nature. She added that slower economic growth in the country played a role, but “we see evidence that the industry backdrop could prove more benign going forward.”
“Looking ahead, as Chinese growth and inflation begin to gather more strength, Yum’s recovery will likely occur in a more favorable macro environment that supports comps,” Senatore wrote.
Performance beyond China also should improve in 2014 as a result of Yum’s recent global realignment of its KFC, Pizza Hut and Taco Bell chains, she added.
“Outside of China,” Senatore wrote, “we believe the reorganization will better align incentives and could support modest upside to targets if brands are run with greater focus.”
Plenty of potential left in China
Same-store sales in Louisville, Ky.-based Yum’s crucial China division fell precipitously to start 2013, following a December broadcast on Chinese state television of a report questioning the safety of the country’s poultry supply. What little progress toward same-store sales recovery KFC had made was derailed in April, when new cases of avian flu were reported in Shanghai, eviscerating demand for chicken once again.
However, Yum’s sales in China have been trending upward since the 29-percent decline in April. The company reported a 1-percent gain in same-store sales in China in November. That month, KFC, which has about 4,500 locations in China, achieved flat comparable sales, while Yum’s second-largest brand in China, Pizza Hut Casual Dining, reported a 7-percent gain in same-store sales.
Senatore noted that KFC’s sales should accelerate the further out from the supply chain and avian-flu controversies the brand gets, especially since trends at Pizza Hut and McDonald’s in China hint at a slowly improving macro economy there. McDonald’s sales declines matched the trajectory of those for KFC this past year, but to a less severe degree because KFC bore the brunt of attention on the poultry supply, she wrote.
“But the data suggest that, beyond the poultry supply and avian-flu issues, weak consumer confidence and spending have also played a role in pressuring restaurant demand trends,” Senatore wrote. “Notably, both Yum’s and McDonald’s top lines appear to be on the same upward trend, a reflection that the industry is starting to emerge from the combined challenges of weak consumption and negative publicity.”
Once that fledgling recovery gains momentum, Yum would be well-positioned for long-term growth in China, both for KFC in the developing interior provinces and for Pizza Hut’s Casual Dining and Home Service formats, she noted.
“Given our view that [KFC] is not structurally impaired, we expect Yum to be able to maintain and perhaps moderately increase the number of KFC openings in coming years, even as the strong Pizza Hut brand continues to accelerate the pace of unit growth,” Senatore wrote.
She added that restaurant margins and investment returns are significantly higher for KFC locations in Tier 3 through Tier 6 cities in China’s interior, which would provide a hedge against margin compression in higher-cost, coastal cities like Shanghai in the future.
“Substantial” long-term growth opportunities remain intact for both Yum’s brands, Senatore estimated. She noted that the foodservice market in China could grow to $700 billion by 2017, with chain restaurants accounting for only 10 percent of total sales, compared with the 55 percent of total foodservice sales reported by chain restaurants in the United States.