MCD McDonalds Corp

By Joanne Chiu 

China's largest restaurant company is bracing for a financial hit from the coronavirus, fresh evidence of how the outbreak is denting corporate profits and depressing the consumer spending that Beijing hopes will power its economic growth.

The gloomy short-term prognosis from Yum China Holdings Inc. reflects how the epidemic has hurt China's hospitality industry, with some cities locked down and many customers staying home to minimize the risk of infection.

Yum China, which runs more than 9,000 KFCs, Pizza Huts and other restaurants in China, has been forced to close more than three in 10 outlets. And in January, Starbucks Corp. said it temporarily closed more than half its stores in China, while McDonald's Corp. has closed several hundred locations in Hubei province, the epicenter of the outbreak.

In a conference call on Wednesday, Chief Executive Joey Wat and colleagues said while many customers were avoiding eating out, demand for delivery was holding up well and Yum China had rolled out "contactless" services requiring less interaction between drivers and customers.

"This arrangement helps to reduce the risk of human-to-human infection and protect our staff, riders and customers," Ms. Wat said, according to a transcript. Managers also said all couriers were wearing face masks, which Yum China took great pains to secure as demand rose.

At restaurants that stayed open, same-store sales plummeted 40% to 50% since the Lunar New Year holiday from a year earlier, due to shorter opening hours, reduced traffic and other factors, Yum China said.

Same-store sales is a way of tracking performance at a retailer or dining group's more established outlets. Yum China calculates the metric only considering stores that were already open at the start of the previous financial year. This year's Lunar New Year holiday began on Jan. 25.

Reporting full-year results on Wednesday, Yum China warned of possible operating losses for the first quarter of 2020--or even for this full year--if sales remained weak. It posted an operating profit, which excludes interest and taxes, of $901 million in 2019.

The company said while it couldn't yet fully determine the impact of the coronavirus disruption, it expected a "materially adverse impact" on its results. Its shares fell nearly 3% in after-hours trading, even after it reported better-than-expected figures for the fourth quarter. Yum China said it was confident in China's long-term market potential.

Some restaurant operators have temporarily closed all their outlets on the mainland, including Hong Kong-listed Haidilao International Holding Ltd. and Jiumaojiu International Holdings Ltd, which both closed their doors on Jan. 26.

Haidilao runs a chain of hot pot restaurants, where diners prepare their own dishes by dunking meat and vegetables into bubbling cauldrons of spicy soup, while recently listed Jiumaojiu is best known for pickled fish dishes.

Walter Woo, a consumer analyst at CMB International Securities Ltd., said disruptions over the typically busy new year break would have a disproportionately large impact on restaurants' full-year profits. In some cases, he said landlords might help by offering free rent for a period of time.

Choonshik Yi, head of Asia equities at UBP Asset Management Asia Ltd., said he remained optimistic about Chinese consumption as growth could rebound quickly once the coronavirus was brought under control.

Speaking generally about companies focused on serving Chinese consumers, he said: "It may sound scary to hear their gloomy guidance but it's a matter of time for sales to recover."

Write to Joanne Chiu at joanne.chiu@wsj.com

(END) Dow Jones Newswires

February 06, 2020 05:21 ET (10:21 GMT)

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