Bird Flu Takes Bite Out Of Yum
The latest stomach-churning results from fast food giant Yum (NYSE: YUM) are a good opportunity for an updated look at the impact that bird flu is having on companies that rely on the restaurant and travel industries in China. Somewhat ironically, these latest dismal results from the operator of KFC and Pizza Hut restaurants actually sparked a rally in Yum shares, since many were expecting the figures to be even worse than they were. But the upside surprise can’t hide the fact that Yum’s China business is hurting badly, both for short-term and longer-term reasons, and is unlikely to rebound significantly for at least the next 2 months. Other companies likely to suffer short-term from the bird flu epidemic in and around Shanghai include food and travel-related firms, as consumers avoid going to China’s commercial hub due to health safety concerns.
I’ll admit that I was somewhat surprised to read that Yum’s China profit tumbled 40 percent in the first quarter, as previous reports had indicated that same-store sales were down by a hefty but still somewhat smaller 20 percent. (English article) Apparently the steep profit decline was still better than many were expecting, since Yum’s shares were up 4.5 percent in after-hours trade after the results announcement. Of course it’s also important to point out that Yum shares are down nearly 15 percent from late last year, when both short- and longer-term issues began to emerge that hinted that its big growth days in China might be nearing an end.
What’s interesting to note in this latest report is that the 20 percent same-store sales drop in the first quarter was completely unrelated to do with bird flu, which really didn’t appear in the headlines until April. Instead, Yum started to feel a pinch last fall when signs began to emerge that growing competition and an overaggressive expansion were beginning to hurt its longer-term performance. (previous post) Its problems worsened at the end of the year due a scandal involving excessive levels of antibiotics in some of its chicken, which was most directly responsible for the big first-quarter decline. (previous post)
Yum previously warned that consumer concerns over bird flu were taking a big bite out of its China business in April, although it wasn’t more specific. I’ve gone to several KFC restaurants in Shanghai over the last week and can confirm that many are only half full or even emptier during peak hours. And even then most people are avoiding full meals and simply having snacks or drinks. Accordingly, I wouldn’t be surprised if Yum’s KFC same-store sales in China are down by more than 50 percent in April, and end up down by 40 percent for the full second quarter.
Other restaurant operators likely to take a hit include global rival McDonalds (NYSE: MCD), as well as mid-sized chains like HOng Kong-listed Japanese noodle shop Ajisen (HKEx: 538). McDonalds shares are down nearly 4 percent over the last week and a half as concerns have grown, and Ajisen shares are down more than 5 percent. Hotel operators are another group taking a hit, with Home Inns (Nasdaq: HMIN) shares down more than 10 percent and China Lodging (Nasdaq: HTHT) down by about 5 percent in the last 2 weeks.
Overall, I do expect the effects of the bird flu scare to be relatively short-lived, as the outbreak has shown no signs of becoming an epidemic and is likely to fade over the next 2 weeks with the arrival of spring. But longer-term issues are likely to dog Yum for the rest of the year, raising the strong possibility that the company could continue to see same store sales contract into the third and fourth quarters as it searches for a new recipe for success.
Bottom line: Bird flu is likely to cause Yum’s China sales to fall 40 percent or more in the second quarter, with more contraction likely due to longer-term issues.
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