Birds of a feather flock together, and the host of problems restaurant operator Yum! Brands (NYSE:YUM) brought upon itself in China have caused the chickens to come home to roost. On Monday Yum! reported that same-store sales at its KFC chicken chain plunged 16% in July, marking a serious setback in its attempt to recover from the litany of problems that have plagued it this past year.
Last year its suppliers were accused of giving chickens unapproved levels of antibiotics, and then it was beset by consumers' fears of avian flu. Most recently it was accused of serving ice cubes that were dirtier than toilet water.
Analysts have said customers are fleeing the chain in droves, reporting declines in comps at some stores of as much as 30%. With Yum! still saying it expects same-store sales to recover by year's end, it's suggesting Wall Street is acting like Chicken Little and needlessly proclaiming the sky is falling.
Not really. Yum!'s Pizza Hut chain is still able to attract a crowd, with comps there rising 3% for the month, which tellingly says its chicken miscues can't be so easily dismissed. Fool analyst Jason Moser notes that food processing equipment maker Middleby, which counts KFC as a big customer, even noticed an appreciable slowdown in equipment sales in China as the pace of new restaurant openings slowed considerably. While it views the situation as temporary, that's really a relative concept. Yum! has been saying the loss of comps was easing over time, but the plunge once more in July means the full effects of this are not over yet and it might not work itself out as quickly as Yum! is hoping.
With some 6,000 KFC restaurants in China, this is a big problem, as it can lose share to its rivals. While McDonald's also sees the need to slow the pace of restaurant openings amid a global slowdown, reducing the number of new stores expected from between 1,500 and 1,600 down to at most 1,550, most of those new ones will be in China because it is still a growth market for it.
Even though I figured 2013 was going to be a lost cause for Yum! because of its China woes, the market defied my expectations and has lifted the restaurant operator's stock nearly 10% since I made my predictions in April. But with customers having flown the coop, Yum! investors may want to use caution over the coming months, as KFC may still lay a big earnings egg.