Yum! Brands, Inc.
) the nightmarish days of 2012 in China might just be coming back
again. The company's stock slid by almost 5% in the trading session
on Thursday, as the company declared that the latest food safety
scare is testing local consumers' loyalty to its KFC and Pizza Hut
In a regulatory filing Yum! stated that adverse media reports in
mid July relating to chicken quality standards significantly hurt
traffic at its KFC and Pizza Hut restaurants in China in just 10
Further, the quick-service chain stated that if the sales decline
persists over an extended period of time, it will dent the
full-year earnings per share results.
Local Chinese television media uncovered a new scandal in July
blaming workers at Shanghai Husi Food Co - unit of U.S.-based OSI
Group LLC - of reusing meat that had fallen on the factory floor as
well as mixing fresh and expired meat. Notably, Notably, Shanghai
Husi Food Co. supplied meat to both KFC - a division of Yum! - and
McDonald's Corp. (
) in the Shanghai region. (Read:
Food-Safety Concerns Threaten Yum! & McDonald's
As Chinese regulators started investigating Shanghai Husi, Yum!
Brands reportedly apologized and announced a change in meat
suppliers. The Shanghai Food and Drug Administration also
reportedly closed down Husi's operations, according to a Forbes
report. However, the damage is already done as is clearly evident
from the declining sales.
The slowdown in sales is bad news for Yum! especially because its
China division had seemingly recovered from the 2012 food safety
ordeals and an avian flu outbreak. The millions that the company
spent over the past two years on promotions, trying to boost sales
and getting a clean bill were successful as customers returned to
its restaurants. In fact, the China Division recorded a 15% rise in
comps in its last reported quarter.
Another cause of concern for Yum! is its dependence on China for a
major part of profit, especially when its U.S. business is
suffering from intense competition, lowered spending and increasing
preference for healthy and nutritious foods among Americans.
Yum! currently carries a Zacks Rank #3 (Hold). Some better-ranked
stocks in the restaurant industry include BJ's Restaurants, Inc. (
) and Chipotle Mexican Grill, Inc. (
). Both these stocks sport a Zacks Rank #1 (Strong Buy).
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