It's almost as if Yum! Brands (NYSE:YUM) stole a page out of J.C. Penney's (NYSE:JCP) playbook. After reporting terrible same-store sales in China for the third quarter, the company was pleased to announce that sales turned positive again in November. Hurray! Not so fast. As often is the case, the devil is in the details.
The so-called turnaround
On Dec. 2, Yum! Brands announced November results for its China division. Same-store sales in China swung to a 1% gain, which appears enormous compared to the 11% nosedive it reported in the third quarter. The problem has been negative publicity regarding poultry in the country affecting the sales of KFC specifically. While its Pizza Hut concept actually saw healthy same-store sales gains of 6% in the quarter, the KFC concept got crushed by 14% to bring down the overall average between the two to 11%.
For November, Pizza Hut continued its strong momentum and saw 7% growth in same-store sales for the month. KFC saw overall flat same-store sales bringing the average for the two combined to a 1% gain.
The problem is simple. KFC China slashed its prices in half on a "bucket promotion" for 10 days during the month. The cheap half prices, which can't possibly be very profitable for KFC, brought parades of guests in the doors; they were mostly there the cheap prices. Sales exploded up 16%, and once you factor in the discount the actual number of guests were up a lot more. After the promotion ended, sales continued their regularly scheduled slide. Same-store sales were down 8% for the rest of the month. An improvement compared to a 14% drop, mind you, but it is hardly a reason to call it a turnaround. It's certainly not something to celebrate. Unless Yum! Brands decides on a new money-losing promotion, fourth-quarter China division sales will almost certainly look bad once again and its KFC-only concept will be worse.
Recent memories of J.C. Penney
The whole thing brings back recent memories of the J.C. Penney garage sale. During its second quarter, J.C. Penney had same-store sales drop by 11.9%, similar in number to Yum! Brands' 11% drop. Then in an all-caps headline from J.C. Penney, the company was pleased to report its "evidence" of a turnaround – October's same-store sales turned positive, up 0.9% (which was similar to Yum! Brands' 1% increase for its China division.)
CEO Mike Ullman of J.C. Penney said the company is "proud" of the sales improvement and believes "the company is on the right track to return to long-term profitable growth." Just like with Yum! Brands, however, the devil was in the details. From the previous two quarters, J.C. Penney had vast quantities of unsold inventory collecting dust on racks and shelves. Unsold inventory over the time period grew by 35%. J.C. Penney slashed prices, sometimes so severely that the company was actually selling the inventory at below cost.
As it turns out, guest traffic was actually down during the month of October. The main reason, by far, that October's sales turned slightly positive is that the lowered number of guests who did come in grabbed some of the bargains.
Foolish final thoughts
In the cases of both Yum! Brands and J.C. Penney, it's certainly possible that the temporary price cuts created happy guests who are more likely to return in the future and pay full price. Still, it was premature and misleading to refer to either case as evidence of turnaround. The lesson here is that you should always read beyond the headlines, especially if there's a major and sudden change; take the time and search for why that change occurred. This goes not only for Yum! Brands and J.C. Penney, but for any other company as well.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.