Restaurants

A chicken shortage in the UK dragged down KFC sales in the first quarter

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Key Points
  • Yum Brands posts weaker-than-expected same-store sales growth in the first quarter despite beating estimates for revenue and profit.
  • Chicken shortages at KFC in the U.K. were a major drag on same-store sales growth.
  • The company is lapping the one-year mark of its pledge to invest $130 million to revitalize Pizza Hut.
People look into a branch of KFC that is closed due to problems with the delivery of chicken on February 20, 2018 in Bristol, England. KFC has been forced to close hundred of its outlets as a shortage of chicken, due to a failure at the company's new delivery firm DHL, has disrupted the fast-food giant's UK operation and is thought to be costing the fast food chain £1million a day.
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A chicken shortage in the U.K. in February weighed heavily on KFC during the first quarter, dragging down same-store sales growth at its parent company, Yum Brands.

While Yum outpaced analyst estimates on revenue and profit, sales at Pizza Hut and Taco Bell were not enough to buoy its same-store sales growth.

Across the three brands, sales at established restaurants rose 1 percent in the quarter, falling short of analyst expectations of 1.9 percent, according to StreetAccount.

Here's how Yum performed in the first quarter:

  • Earnings: 90 cents per share, adjusted, vs. 68 cents per share expected by Thomson Reuters
  • Revenue: $1.37 billion vs. $1.09 billion expected by Thomson Reuters
  • Overall same-store sales: Up 1 percent vs. up 1.9 percent, expected by StreetAccount

Shares slipped more than 5 percent in trading Wednesday.

Some KFC restaurants in the U.K. were forced to temporarily close in February because they ran out of chicken after its new delivery partner DHL was unable to fulfill deliveries.

Same-store sales at KFC in the quarter were up 2 percent, weaker than the 2.6 percent analysts had forecast, according to StreetAccount.

"Adjusting for the impact of this, we estimate Yum same-store sales growth would have been 2 percent and KFC's same-store sales growth would have been 3 percent," David Gibbs, president and chief financial officer at Yum, said during the earnings conference call Wednesday.

The company expects to take an additional hit from the U.K. incident in the second quarter due to a decrease in marketing while some of its locations were shuttered.

On the call, Gibbs said the second quarter will be "the worst quarter of the year, most likely."

In the quarter ended March 31, the company said net income rose to $433 million, or $1.27 per share, up from $280 million, or 77 cents per share, a year earlier.

Excluding items, the company earned 90 cents per share, better than the 68 cents per share analysts in a Thomson Reuters survey had expected.

The company's revenue fell 3 percent to $1.37 billion, compared with $1.42 billion last year. Wall Street had expected revenue to be $1.09 billion, according to Thomson Reuters estimates.

"As we begin the second full year of our transformation journey, I'm pleased with our progress towards becoming a more focused, more franchised and more efficient company," CEO Greg Creed said in a statement Wednesday. "We're maintaining all aspects of our full-year 2018 guidance and remain confident that this transformation is building a strong foundation for long-term growth and will deliver increased returns for our stakeholders."

The company reiterated its forecast that same-store sales will grow 2 to 3 percent this year and that net new unit growth will be 3 to 4 percent.

At this time last year, investors were calling for Yum to divest Pizza Hut. Instead, the company plowed $130 million into new equipment, technology and marketing. The chain also has been heavily discounting its pizza and even launched a new rewards program, to steal market share from competitors like Domino's Pizza and Papa John's.

Despite the investment, Pizza Hut same-store sales were up 1 percent, missing the mark of 1.8 percent that analysts had expected.

"Pizza Hut is a global iconic brand and the recent same-store sales results are simply not acceptable," Creed said on the call.

Meanwhile, Taco Bell beat expectations with growth of 1 percent. Analysts had forecast same-store sales growth of 0.8 percent for the quarter.

While the launch of Nacho Fries created buzz, the popularity of this promotion, as well as other $1 value items, weighed heavily on margins during the quarter.

"I think the good news is that you know we're not a one-trick pony when it comes to value," Creed said on the call. "We've got a lot of really smart plays around value."