KFC sales hard to swallow for Restaurant Brands

Restaurant Brands's key Kentucky Fried Chicken chain dished up another spoilt serving today in the form of a sales slump. The profit warning, the second in three months, sent the company's shares sliding 6 cents, 5 per cent, to $1.20 and raised questions of whether the Colonel's brand was past its use-by date.

The New Zealand Herald
November 18, 2003

KFC sales hard to swallow for Restaurant Brands
Simon Louisson

UPDATED REPORT - Restaurant Brands's key Kentucky Fried Chicken chain dished up another spoilt serving today in the form of a sales slump.

The profit warning, the second in three months, sent the company's shares sliding 6 cents, 5 per cent, to $1.20 and raised questions of whether the Colonel's brand was past its use-by date.

Macquarie Equities analyst Warren Doak said the KFC business could be at a cross-roads - either in structural decline, or hit by a sales blip from which it would recover as the new management applied TLC.
Last month, Restaurant Brands, also owner of the Pizza Hut, and Starbucks Coffee brands, said it expected to achieve similar profits for the second half year as the same period last year.

"Since that announcement the company's KFC business has experienced a downturn in sales, which has been a reversal of the improving trend experienced over the previous three quarters," the company said in a statement.

Mr Doak said it was the extent of the sales slump - a 7.5 per cent dive in same store sales - that shocked. It was the worst quarterly performance since Restaurant Brands was listed in 1997.

"Those with a negative slant will say that this reflects the demise of the KFC brand - that its mature, that because of its nature it lacks the ability to develop new and sexy products; it faces obesity issues, health issues, GE (genetic engineering) issues and maybe as people get more and more lazy it doesn't lend itself to delivery because it's not a snack food."

However, Mr Doak said there was a good chance this was a one-off event and to write KFC's obituary could be premature.

"A trend takes time and you don't just fall off a cliff. If it was an obesity issue, or a GE issue, you would see a steady decline over time, and you haven't."

"It may just literally be just bad luck."

Mr Doak pointed to the caning given The Warehouse after its poor sales at Christmas last year but the company later stormed back.

A worrying aspect though was that there was no obvious negative macro-environmental forces.

ASB Securities broker Stephen Wright said investors tended to be impatient with companies that repeatedly fail to deliver.

"Once these companies embark on profit warnings, there always seems to be two or three or four of them before they finally get to the bottom of it."

The company said two KFC promotions launched earlier in the year did not produce the sales expected, leading to stock write-offs.

"Recent new product development introductions and promotional initiatives are expected to address sales performance, but whilst these have started to turn around sales in KFC, their impact is currently not forecast to be sufficient to address the downturn experienced in recent weeks," the company said.

The KFC sales shortfall would knock the result by $2 million in the second half, the company said.
Other brands are performing at, or close to, expectation.

Mr Wright noted that most costs at fast food operations were fixed and such companies needed sales growth to boost profits.

Restaurant Brands said its directors believed the problem to be short-term.

For the first half, Restaurant Brands recorded a half-year net profit drop of nearly 15 per cent to $4.3 million. KFC sales dropped 1.6 per cent to $94.3 million although the group said then the brand was trending slowly upwards from its 6.5 per cent decline in last year's fourth quarter.

The company issued a profit warning in September. KFC was also the culprit then as profits were battered by unexpected maintenance costs and a squeeze on margins.

Restaurant Brands said it still expected to maintain the dividend for year-end. More details would be released on December 9 at its third quarter sales notice.

- NZPA


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