UK chicken shortage weighs on Yum! Brands Q1
May 3, 2018
by Erica Shaffer
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LOUISVILLE – Shares of Yum! Brands Inc., parent company of KFC, Pizza Hut and Taco Bell, slipped 7 percent at close as the company missed analysts’ same-store sales targets while profit beat expectations during its fiscal first quarter.
Worldwide same-store sales grew 1 percent, missing expectations of 1.9 percent same-store sales growth. Executives at Yum attributed the result to disruptions in supplies of chicken to KFC locations in the United Kingdom and Ireland.
The KFC business reported global same-store sales growth of 2 percent compared with estimates of 2.9 percent. The KFC division opened 262 new international restaurants in 42 countries. Operating margin climbed 5.3 percent to 33.6 percent on refranchising and same-store sales growth, the company said.
But system sales growth at KFC in the United Kingdom dropped 9 percent in the first quarter. On Feb. 19, more than 800 of the 900 KFC restaurants in the United Kingdom were closed with another 600 closed during the lunch hour on Feb. 20 due to a shortage of chicken. Creed and CFO David Gibbs addressed the supply disruptions during a discussion with analysts. The problem occurred when the company changed distribution partners.
Gibbs told analysts the impact on full-year same-store growth is estimated to be 50 basis points for KFC and 25 basis points for Yum.
“The impact to full-year core operating profit growth is estimated to be 2 percent for KFC and 1 percent for Yum!,” Gibbs said. “While this is a significant event for our UK market and we are collaborating with our franchise partners to ensure they are set up for success, the limited impact to Yum! demonstrates the power of the franchise model diversified across brands and geographies. As such, we are maintaining our full-year guidance, despite the UK supply disruption.”
“Despite the challenges, the team worked with our new partners, leveraged our culture and rose to the occasion, truly all hands-on deck, working around the clock and countless hours to correct the issue, even responding with clever advertising in the brand’s unique voice,” Creed said.
“Encouragingly, the customers are responding to our efforts in a very positive manner,” he added. “As of today, all 871 restaurants are open for their normal hours. Approximately one-third of the restaurants are up and running with the former supplier and the remaining two-thirds of the restaurants are successfully receiving product from the new supplier. As we recover from the incident, clearly, we are applying our lessons learned to ensure this does not happen anywhere else in the world.”
Moving to the Pizza Hut business, same-store sales growth was 4 percent in the United States, while international same-store sales eased 2 percent in the most recent quarter. Operating margin eased 0.6 percentage points to 35.0 percent for the quarter. The division opened 148 new international restaurants in 39 countries.
“Consistent with what I’ve said before, the turnaround of the brand in the US will be a gradual build,” Creed explained. “However, we continue to see positive momentum as a result of the Transformation Agreement and focus on being hot, fast and reliable. Our investment in digital, operations, advertising and delivery drivers, is paying off with improvements in internal operating metrics, including online conversion and delivery times.”
Creed detailed steps Yum is taking to drive the turnaround at Pizza Hut. He said the company is ensuring that strong operations and digital execution are in place to deliver on speed, taste and ease. Offering compelling value is the second strategy and third is consistent communication of Pizza Hut’s For The Love of Pizza brand positioning.
“We are diligently working to implement these steps at each of our international markets and will update you as we progress,” he said.
Same-store sales at the Taco Bell division climbed 1 percent during the first quarter of 2018 compared with 8 percent reported in the year-ago period. But operating margin in the business declined 2.7 percent to 28.5 percent. The division opened 56 new restaurants, including 11 new international restaurants.
“In the US, we successfully lapped an 8 percent same-store sales growth in the first quarter of last year, due in large part to the very successful launch of Nacho Fries,” Creed said. “Everything about this product was innovative, from the Web of Fries faux movie trailer to the Mexican seasoning and Nacho Cheese sauce.”
Taco Bell sold more than 53 million orders of Nacho Fries in the first five weeks which prompted the chain to extend the limited-time offering into April.
For the first quarter ended March 31, 2018, the company reported net income of $433 million, or $1.27 per diluted share, compared with $280 million, or $0.77 per diluted share, in the year-ago quarter. First quarter earnings per share, excluding special items, was $0.90.
Revenues for the quarter were $1,371 million, down from $1,417 reported in the first quarter of 2017.
“As we begin the second full year of our transformation journey, I’m pleased with our progress towards becoming a more focused, more franchised and more efficient company,” Creed said in a statement. “As a result of the timing mismatch between refranchising and associated G&A savings and the new revenue recognition accounting standard, core operating profit growth was flat, which is consistent with our expectations. We’re maintaining all aspects of our full-year 2018 guidance and remain confident that this transformation is building a strong foundation for long-term growth and will deliver increased returns for our stakeholders.”