Yum's China woes slam sales and profits

Mon Feb 4, 2013 6:13pm EST
 

By Lisa Baertlein

(Reuters) - KFC parent Yum Brands Inc (YUM.N: Quote) on Monday warned that it expects 2013 earnings to shrink rather than grow, as it grapples with a food safety scare in China where it makes more than half of its overall revenue.

Yum shares fell 6 percent in after-hours trading, as the news was even worse than expected by the analysts, who have largely stuck by the company in recent months.

Yum, which gets more than half of its overall sales and operating profit from China, reported a 6 percent drop in fourth-quarter sales at established restaurants in China due to "adverse publicity" regarding its poultry supply.

Its business there continued to suffer in January, when China same-store sales dropped 37 percent, including a 41 percent fall for KFC and a 15 percent decline for Pizza Hut Casual Dining.

As a result, Yum forecast a "mid-single digit" percentage decline in earnings per share for 2013. Yum previously forecast 2013 earnings per share growth of at least 10 percent, and analysts polled by Thomson Reuters I/B/E/S on average had expected the same.

Yum has nearly 5,300 restaurants in China, mostly KFC. Its strong reputation for high food quality helped it grow briskly in a country where there have been some serious food safety scandals.

But the company was shaken by revelations that two of its poultry suppliers purchased chicken from farmers who used excessive levels of antibiotics in their animals. While the company was not fined by food safety authorities, it has suffered a huge backlash on social media in the country.

"I don't think anybody saw this coming," said Edward Jones analyst Jack Russo, who like many others expects the company to eventually bounce back. "Investors are definitely going to need some patience."   Continued...

 
People walk past a KFC restaurant in Shanghai, China in this January 17, 2013 file photograph. KFC parent Yum Brands Inc on Monday reported a 6 percent drop in fourth-quarter sales at established restaurants in China after a food safety scare ensnared some of its chicken suppliers in its top market. REUTERS/Aly Song/Files