Coming to the larger industry, the threat of negative public relations headlines is inherent within the fast food industry (e.g. McDonald’s Corporation (NYSE:MCD) faced the issue of mad cow disease and Yum! Brands, Inc. (NYSE:YUM) previously faced an avian flu scare in 2005, as a result of which its sales declined 40%). Further, recent reports of horsemeat in beef supplies in the UK have put these companies in a negative light once again.
These companies are often held responsible for various health issues, like the recent obesity epidemic. However, as consumers become more and more health conscious and move towards a healthier diet, food companies may also be faced with declining sales. A recent Bloomberg report has mentioned that U.S. adults consumed fewer calories from fast food between 2007 and 2010, an average of 11.3%, as compared to the 2003 to 2006 period, an average of 12.8%.
Competitors
Problems for McDonald’s Corporation (NYSE:MCD)’s began in October 2012 as it posted its first global monthly restaurant same store sales decline in the last nine years. The decline in its comps continued even in February, but the decline was slightly lower than analyst expectations. It has increased its focus on new food, limited-time offers and low priced food as it tries to attract US diners who have cut back on restaurant meals due to higher taxes and rising gas prices.
In contrast, Burger King has posted stronger 4Q12 global comps of 2.7% with 3.7% growth in the US. Its new menu items and promotions have helped to post better 4Q12 results vs. its lackluster results last month, with comps of 0.1% globally and 0.3% in the US. Due to its shift to franchisee-owned model it recorded a 30% decline in revenues, but its net income doubled as the revised model significantly reduced costs. However, with its recent admission of horsemeat in its UK supplies, I wonder if it will face the same fate as Yum.
Conclusion
Yum is currently facing a serious lashing due to the China issue. It has announced a 13% decline in comparable same store sales in February compared to the 22% decline in January. It is also trying to rebuild its brands and has launched a campaign for the same.
Despite the slump in its comps, many research analysts continue to maintain their ratings on the company. Many analysts view the lower decline in comps in February as a signal that the worst is over for Yum, and the focus is now on how long Yum will take to recover from this issue.
I would give Yum a “Hold” rating given its strong track record of success and growth. Only time will tell if it will be able to regain its performance in China or whether this incident will derail the company from its growth track.
The article Is This Stock Yummy or Not? originally appeared on Fool.com is written by Sujata Dutta.
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