YUM! Meets Investors In New York Amid Mixed 2014 Outlook That Includes A Challenge In China

  @natrudy on December 04 2013 8:29 AM
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    Xu Fei, an employee at KFC, poses in front of a KFC restaurant in the Hongkou district of Shanghai, May 31, 2013. Reuters
  • KFC
    A customer walks into a KFC restaurant in South Los Angeles. Reuters
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KFC, Taco Bell and Pizza Hut owner Yum! Brands Inc. (NYSE:YUM) hosts its investor day in New York on Wednesday, after it forecasted a mixed outlook for 2014 and its intention to recover from a sales plunge in China.

The investor day will focus on the company’s global expansion and will feature a business and strategy update, according to a regulatory filing earlier this week.

In that same filing, the company reconfirmed its 2013 earnings-per-share forecast of less than a 10 percent decline compared last year. That comes after weak sales in China, which were especially harsh at KFC restaurants there after an avian flu scare and an investigation into its suppliers rocked YUM!’s 2013.

But the company expects 20 percent EPS growth in 2014, excluding one-off items.

“We expect to have a strong bounceback in 2014 following a year that is clearly below our high expectations," YUM! CEO David Novak said in a statement. "In China, we have an aggressive plan to reignite sales at KFC.”

In the filing earlier this week, the company said November sales in China grew 1 percent, with flat sales at KFC and 7 percent growth in Pizza Hut’s Casual Dining.

But the company had to thank a limited-time, half-price chicken bucket deal for strong November KFC sales. After that 10-day promotion ended, KFC sales in China were down 8 percent for the rest of the month.

“This volatility makes it difficult to read underlying trends at KFC,” wrote Deutsche Bank analyst Jason West in a note on Monday, pointing to the promotion’s outsize impact. “Bears will point to the fact that KFC sales decelerated at the end of November.”

West also cut his sales forecast for KFC China sales in December slightly.

YUM!’s broader China sales have fallen consistently for the past three quarters, with a 10 percent plunge in August compared to the previous month. The company has bet on an operating profit growth of 40 percent for 2014 in China, however, where it also plans to open at least 700 new stores.

More broadly, YUM! will spend $1.2 billion in capital expenditures in 2014, and it seeks to open at least 1,850 new stores internationally, including 150 stores in India and 400 new Pizza Hut branches. The company seeks to lead in emerging markets, where it has a strong presence, but it will also launch a new Taco Bell breakfast menu in the U.S.

The company will reorganize its business units as of Jan. 1, it said in late November, to focus on China and India.

Significant growth in Southeast Asia, Africa and Europe make YUM!’s international division the most stable, noted Barclays analyst Jeff Bernstein in an investor day preview note from late November.

“We expect color on the recently announced reorganization of their reporting structure to focus more on each brand, and less on geography,” he wrote then. But he added: “For better or for worse, the primary focus of the conference will be China,” noting that the region provides 40 percent of YUM!’s global profits.

“Specifically, will China return to full strength, or has it suffered permanent damage?”

Recent KFC publicity efforts, with slogans like “Trust in every bite,” may not have reassured consumers enough, Reuters reported. A ConsumerEdge Research poll in November found that food safety concerns were prominent among 1,000 Chinese residents surveyed.

“They are obviously doing a lot of marketing about the quality of their brand and the cleanliness of their brand,” said Bernstein at a New York retail panel last week. But he added: “They say their best friend is the passage of time.” He expects China sales to recover in early 2014.

Watch the annual investor meeting here

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