Yum! Brands’ third quarter hurt by China supplier incident

By: Yinmeng Liu

Yum! Brands Earning Per Share Graph From Quarter 4 2013 to Quarter 3 2014
Yum! Brands Earning Per Share Graph From Quarter 4 2013 to Quarter 3 2014

Yum! Brands Inc.’s third-quarter earnings were roughly in line with Wall Street’s expectations, even though revenue plunged at the restaurant chain’s fast-growing Chinese division.

For the quarter ended Sept. 6, the parent company of Pizza Hut, KFC, Taco Bell and Wing Street said Wednesday that net income climbed to $404 million, or 89 cents per diluted share, from $152 million, or 33 cents a diluted share, from a year ago.

Last year, net income for the Louisville, Kentucky based restaurant chain suffered from a $300 million restructuring charge.  Excluding special items, the earnings for the fast-food operator is 87 cents per diluted share this year — a penny short of forecasts — and 85 cents a diluted share in the year-ago quarter.

Yum! Brands’ revenue fell 3.5 percent to $3. 35 billion from $3.47 billion the same quarter last year.

The fast-food chain had been enjoying strong growth in China before an undercover report on July 20 revealed that a beef and poultry supplier to the company had violated food-safety regulations.

Yum! Brands announced it had terminated business with the supplier immediately following the incident. Nevertheless, the company’s stock tumbled 13 percent in a matter of days.    On Wednesday, Yum disclosed that revenue for its China division fell 9 percent in the third quarter.  At stores open at least twelve months, sales declined by a painful 14 percent.

David Novak, Chairman and CEO of Yum! Brands, remains optimistic in regards to the chain’s future development in China’s emerging market.

“China sales are on the path to recovery and we expect to develop at least 700 new restaurants in China this year, which we’re confident will ultimately deliver high returns as we further capitalize on the world’s fastest consuming class,” Novak said in a statement released by the company.

John D. Staszak, an analyst from Argus Research who specializes in gaming, restaurant and hotels, told investors to not worry too much about Yum! Brands’ recent sales decline.

“The Chinese economy is slowing down right now,” Staszak said. “But its secular chain trend is going pretty well. Chinese people like to spend on food and gambling. So it’s going to be a good market in the long term.”

In his most recent note on Yum! Brands, R.J. Hottovy from Morningstar Inc. cited the food operator’s strong brand intangible assets, cohesive franchise network, and favorable bargaining position with suppliers as factors behind a possible quick recovery in China.

“Though we don’t expect China comps to return to positive territory until the first half of 2015 and now anticipate year-over-year restaurant margins to remain roughly flat around 15.4 percent,”Hottovy wrote, “the fact that China restaurant margins would have been north of 20 percent excluding food-supplier-related deleveraging and food disposal costs (implying a responsible balance to discounting in China as the company rebuilds traffic) gives us confidence that China restaurant margins of 20% are achievable long-term.”

Yum Brands’ stock in the New York Stock Exchange was up $1.01, or 1.5 percent, to close on $70.74 on Wednesday,.