Yum! Brands Inc. lowered its earnings estimates for the full year this week, after same-store sales in China have taken longer to recover than the company expected.
The company said same-store sales for the full year in China will be in the “mid-single digits,” and that full-year earnings per share growth would be in the mid-single digits. The company had expected EPS growth of 6 percent to 10 percent.
Yum said Tuesday it expects EPS growth of at least 10 percent in 2015, which would return the Louisville, Ky.-based quick-service operator to double-digit earnings growth for the first time since 2012.
“We are firmly committed to returning to double-digit EPS growth in 2015,” incoming Yum CEO Greg Creed said in a statement. Creed will become chief executive effective Jan. 1. “We fully expect to bounce back in China and benefit from tremendous sales leverage as sales rebound. We have solid plans to drive same-store sales growth and margin improvement in China while continuing to open new restaurants with confidence in the world’s fastest growing economy.”
Yum’s problems in China date to July, when a report from a Chinese television station showed workers at a subsidiary of U.S.-based food processor OSI Group LLC apparently making chicken products from expired meat. OSI was a supplier to McDonald’s, as well as KFC and other U.S. brands in the country.
Sales at many Western brands there have since plunged, including a 14-percent drop for Yum Brands’ China division. Baird analyst David Tarantino estimated that Yum’s sales fell as much as 30 percent or more in July and August in the immediate aftermath of the scandal.
The problems are particularly acute for Yum because the company has come to rely heavily on its more than 6,400 restaurants in China for sales and profits. Even after the steep decline in same-store sales in the third quarter, China represents more than half of Yum’s revenue and nearly 40 percent of the company’s profit.
It also wasn’t Yum’s first problem in China. Yum’s EPS declined 9 percent there last year because of a poultry supply incident in late 2012 that hurt sales in the country in 2013. A year ago at this time, Yum executives predicted 20-percent earnings growth in 2014 as that issue waned, making the OSI scandal that much more frustrating for the company.
Bernstein Research analyst Sara Senatore wrote that if recovery in China remains slow, Yum might be pressured to do something more significant with its business there.
“Should it become clearer that the China comp recovery is stalling, we anticipate that Yum management will be more receptive to new ideas for its China business,” Senatore wrote. “These could include a potential partial spinoff of Yum China and/or a longer-term commitment to franchising/refranchising the market.”
Still, Yum is planning a comeback in China. It projects operating profit for its restaurants in the country to grow at least 15 percent in 2015, and anticipates 700 new units there.
Outside China, KFC is projected to have operating profit growth of 10 percent next year, as is Pizza Hut. Taco Bell projects operating profit growth of 6 percent, the company said this week.
KFC will have 700 new international units, while Pizza Hut will have 600 new international locations and Yum Brands India will build 125 new international units in 2015, according to company projections. Taco Bell expects to have 150 net new units next year.
Contact Jonathan Maze at [email protected].
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