YUM: WARNING SHOTS FIRED

YUM: WARNING SHOTS FIRED - 1

YUM filed an 8-K yesterday after the close, in which it discussed the recent food scandal involving supplier Shanghai Husi, a division of OSI.  The company has since terminated its relationship with OSI globally, but severe damage has been done. 

According to the company:

  • "While OSI was not a major supplier to Yum! Brands, these events triggered extensive news coverage in China that has shaken consumer confidence, impacted brand usage, and disparaged the hard work of our over 400,000 Chinese employees."
  • "The result has been a significant, negative impact to same-store sales at both KFC and Pizza Hut in China over the past 10 days."
  • "At this point, it is too early to know how quickly sales will rebound in China and the corresponding full-year financial impact to Yum! Brands."
  • "However, if the significant sales impact is sustained, it will have a material effect on full-year earnings per share." 

Recall that on July 23, 2014, we removed long YUM from our Investment Ideas list (YUM: Losing Faith) on the basis of a significant, anticipated setback in China following the initial report of improper food handling practices in the country.  Chinese consumers are still fragile and, as we opined, the consequences of this event would be material.  As it stands, we believe consensus full-year same-store sales (depicted in the chart below) and earnings estimates are far too aggressive.  We won't know much more until the company reports 3Q14 results in October, but this is a name we'd stay away from.

YUM: WARNING SHOTS FIRED - 2

Call with questions.

Howard Penney

Managing Director

Fred Masotta

Analyst