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Summary

  • Following a meat scandal in China, Yum! Brands warns of a 13% drop in same-store sales for its China division.
  • The news actually dampened my bearish opinion somewhat.
  • I was expecting China sales to get hurt but not expecting a recovery to start to be seen already.

In after hours on September 3, Yum! Brands (NYSE:YUM) filed an 8K warning that both KFC and Pizza Hut for its China division are taking a beating following the expired meat scandal. The company issued this statement:

"Since July 21st, Yum! Brands' China division has experienced a significant, negative impact to sales at both KFC and Pizza Hut following adverse publicity regarding improper food handling practices by former supplier, Shanghai Husi, a division of OSI. As such, China division same-store sales for the third quarter ended August 31st are now estimated to be approximately -13% versus prior year. While sales are beginning to rebound, they continue to be negative. Our brands have proven resilient over time and we expect this to be the case with this situation as well."

Maybe the people of China are getting numb to media hype. The last time Yum! Brands experienced a scare in China, it was regarding its poultry supplier and same-store sales suffered 13% then too as a result. It took a full year of hard work, marketing, promotions, and menu shifts to win back the consumer. The 13% setback I did expect as I wrote in my article Just When You Thought It Was Safe For KFC To Go Back In The China Water. However, I didn't expect the company to report it is already seeing signs of sales beginning to rebound.

That being said, my conclusion stands even more strongly as a result. I stated then and I reiterate now,

"If you're a long-term investor, look at the long term picture and if we don't think short-term stock-price-hurting events matter for the long term, then consider taking a closer look. Yum! Brands should be able to win but it will be important to pay attention to what plans it has to tackle this publicity problem if indeed sales take a big hit from scandal."

Source: Update: Yum Brands Warns On China Sales