Yum 'Likely to Lower' 2013 Forecast: Analyst
Following Yum Brands' warning that fourth-quarter same-store sales had fallen more than expected in China, a forecast that sent the stock sliding on Tuesday, one analyst questioned to what extent this revision could be tied to weakening demand.
On Monday, Yum, the parent company of KFC, Taco Bell and Pizza Hut, announced that it expects China fourth-quarter same-store sales to be down 6 percent due to "adverse publicity" from a Chinese government review of the country's poultry supply, which it said had a "significant impact" on KFC sales. Earlier, Yum had guided for a 4-percent decline in sales.
In late December, Chinese food safety authorities said that KFC was supplied with chicken that contained excess amounts of antibiotics, and the company said at the time that it had seen some impact on sales. The finding by the Shanghai Food and Drug Administration dealt a blow to KFC's reputation in China, where it faces steep competition.
On Monday, Yum reiterated its expectations for 2012 earnings per share, excluding special items, of $3.24. Analysts polled by Thomson Reuters on average expected earnings of $3.26 per share.
"So I think the real question is to what extent is this just a one-time event and to what extent is this possibly masking overall weakening demand, which has continued to progress throughout the quarter and what will the implications be for 2013?" said Rachael Rothman, an analyst at Susquehanna Financial Group.
For the full-year 2013, Yum had previously forecast mid-single-digit percentage same-restaurant sales growth in China.
"I think when they report fourth quarter now they're likely to lower that bar and investors will probably be cautious about the sales trajectory in China for the balance of 2013 from this point going forward," Rothman said.
Yum isn't the only fast-food behemoth to have used suppliers that Chinese food safety officials have scrutinized. Last month, McDonald's said it had stopped buying meat from Liuhe Group after a report that the poultry supplier was not properly inspecting chicken bought from farmers.
"If I were to make a guess about whether the impact would be the same for McDonald's as Yum, I would say it would be much stronger for Yum just in the sense that KFC is strongly identified as a chicken brand whereas McDonald's is not necessarily as closed tied to chicken, even in China, as Yum is," Rothman said.
If consumers were to become fearful of chicken products in general, Rothman said she thinks the concern "would paint Yum with a stronger brush than it would McDonald's in that instance."
Since Yum's downward revision of same-store sales, its shares have slid about 4 percent. The stock is currently trading just shy of $65, Rothman's price target.
So is this drop in price enough, according to Rothman?
"It's only enough if comps can reaccelerate and be positive for 2013," she added.
—Written by CNBC's Katie Little. Reuters contributed to this report. Follow Katie Little on Twitter @Katie_Little_
Susquehanna Financial Group is a market maker in the securities of Yum Brands.