Yum! to Grow China Comps with New Units, Breakfast Menu
Yum! Brands, Inc. (YUM) continues to bet on China, despite the problems plaguing the company in that region. The company – which currently operates 6,700 restaurants in China – announced in its investor meeting that it has aggressive expansion plans in the near term and increase the number of units by threefold.
According to Bloomberg, the company is banking on menu innovation in its 4,800 KFC outlets, apart from adding the breakfast option to more than half of its 1,300 Pizza Huts outlets in China. The breakfast segment has recently been a bright spot on Yum!’s radar and the company continues to build on the popularity that breakfast enjoys.
Yum!, like McDonald's Corp. (MCD), is seeking to renovate the brand and turn around its fortunes after the scandal associated with the quality of chicken from its suppliers in China resulted in declining traffic at its restaurants, thus affecting comps drastically. (Read: McDonald's to Trim Menu & Remove Some Extra Value Meals)
Yum!’s comps in China has been declining ever since local Chinese television media uncovered a scandal in July blaming workers at Shanghai Husi Food Co. — unit of the 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, Shanghai Husi supplied meat to KFC — a division of Yum! — in the Shanghai region.
As Chinese regulators started investigating Shanghai Husi, Yum! Brands reportedly apologized and announced a change in meat suppliers. Reportedly, the Shanghai Food and Drug Administration also shuttered Shanghai Husi’s operations. However, the damage had already been done.
Although sales have improved since then, the recovery has been slower than expected. The company expects its China Division comps to decline by mid single-digits in 2014.
Earlier this week, the company had slashed its earnings per share estimate for 2014 for the second time this year. The company now estimates this year’s earnings to grow in mid single-digit range, versus prior expectation of 6–10% improvement. Earlier, in October, during its third-quarter earnings call, the company slashed its earnings forecast from 20%
However, Yum! has a brighter view for 2015. The company anticipates that it will deliver earnings growth of 10% or more, depending on the sales recovery in China. Further, profit in the China division is expected to be at least 15%. Both the KFC and the Pizza Hut Divisions are expected to post operating profit growth of 10%, while the Taco Bell Division is expected to report 6%.
Management believes that the makeover of the Pizza Hut division along with the sales momentum at the KFC and Taco Bell divisions will drive earnings growth. Further, the company is focusing on extensive menu innovation to drive comps at its restaurants.
Yum! is also betting on international expansion to improve the top line. In 2015, the company plans to open over 2,100 international outlets, including 700 in China, 125 in India, 700 KFC units and 600 Pizza Hut units. The company plans to open 150 units under the Taco Bell Division. Global capital expenditures are expected to be roughly $1.2 billion.
Yum! Brands currently has a Zacks Rank #4 (Sell). Better-ranked stocks in the same sector include BJ's Restaurants, Inc. (BJRI) and DineEquity, Inc. (DIN). Both these stocks sport a Zacks Rank #1 (Strong Buy).
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