For Yum! Brands, Inc. (YUM) the nightmarish days of 2012 in China might just be coming back again. The company’s stock slid by almost 5% in the trading session on Thursday, as the company declared that the latest food safety scare is testing local consumers' loyalty to its KFC and Pizza Hut brands.
In a regulatory filing Yum! stated that adverse media reports in mid July relating to chicken quality standards significantly hurt traffic at its KFC and Pizza Hut restaurants in China in just 10 days thereafter.
Further, the quick-service chain stated that if the sales decline persists over an extended period of time, it will dent the full-year earnings per share results.
Adverse Publicity
Local Chinese television media uncovered a new scandal in July blaming workers at Shanghai Husi Food Co – unit of U.S.-based OSI Group LLC – of reusing meat that had fallen on the factory floor as well as mixing fresh and expired meat. Notably, Notably, Shanghai Husi Food Co. supplied meat to both KFC — a division of Yum! — and McDonald's Corp. (MCD) in the Shanghai region. (Read: Food-Safety Concerns Threaten Yum! & McDonald's China Sales)
As Chinese regulators started investigating Shanghai Husi, Yum! Brands reportedly apologized and announced a change in meat suppliers. The Shanghai Food and Drug Administration also reportedly closed down Husi’s operations, according to a Forbes report. However, the damage is already done as is clearly evident from the declining sales.
Bad News
The slowdown in sales is bad news for Yum! especially because its China division had seemingly recovered from the 2012 food safety ordeals and an avian flu outbreak. The millions that the company spent over the past two years on promotions, trying to boost sales and getting a clean bill were successful as customers returned to its restaurants. In fact, the China Division recorded a 15% rise in comps in its last reported quarter.
Another cause of concern for Yum! is its dependence on China for a major part of profit, especially when its U.S. business is suffering from intense competition, lowered spending and increasing preference for healthy and nutritious foods among Americans.
Yum! currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the restaurant industry include BJ's Restaurants, Inc. (BJRI) and Chipotle Mexican Grill, Inc. (CMG). Both these stocks sport a Zacks Rank #1 (Strong Buy).
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