Is 2013 a Lost Cause for Yum! Stock?

After suffering the ignominy of being outed for giving chickens unapproved levels of antibiotics at its KFC chain in China last year, Yum! Brands (NYSE: YUM  ) stock is being gobbled up again, jumping 7% the other day after reporting earnings.

That's despite the fact that its China division -- the company's largest segment generating more than $1.1 billion for the restaurant chain -- saw sales tumble 5.5% in the first quarter and leading an overall decline of 10% in companywide revenues. Nor is it helping that China is in the grips of a new bout of avian flu, which has killed almost two dozen people and sickened hundreds. Sales have plunged 30% so far this month there.

Yet based on its experience with past outbreaks of influenza in China, Yum! says to expect a recovery to begin in 2014, essentially writing off the rest of this year. In his comments to analysts during the earnings conference call the other day, Yum! president Richard Carucci told Wall Street not to "spend too much time focusing on 2013 results" but rather look to next year because that's when they can expect the turnaround to take hold.

Should investors write off 2013 as well? It certainly doesn't look good for the owner of KFC, Pizza Hut, and Taco Bell. While China's results have been buffeted by a confluence of events, some of which were of its own making, U.S. sales tumbled almost 20% and the rest of its international sales were down 13%. It's not just trust that needs to be rebuilt in that country for the restaurant operator, but a way to drive diners back to its chains everywhere.

It is encouraging that internationally it is seeing strong growth in its new key markets -- Africa, France, Germany, and Russia -- but they comprise just a small portion of overall sales for the division, which itself is only a quarter of total revenues. 

China still represents a big opportunity for Yum! if for no other reason than that the market has been largely abandoned or avoided by most of its rivals. Only McDonald's continues to invest resources expanding its presence there (of the 750 restaurants opened in the Asia-Pacific, Middle East, and Africa division, one-third were in China).

However, because Yum!'s KFC is its biggest brand in the country, the tainted chicken scandal is going to linger and it needs the avian flu outbreak to end quickly. That's doesn't look like it's happening anytime soon as it recently spread to Taiwan and is being labeled the most deadly strain seen. 

Yum!'s stock may have gotten a boost after the tough talk about recovery next year, but I think investors will fly the coop again and will write off not only 2013 like management says to do but a good chunk of 2014, too.


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11/28/2014 1:00 PM
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