Yum stumbles badly in China, warns on profit

Mon Feb 4, 2013 8:11pm EST
 

By Lisa Baertlein

(Reuters) - KFC parent Yum Brands Inc (YUM.N: Quote) warned on Monday that it expects 2013 earnings to shrink rather than grow as it struggles to manage a food safety scare in China, and sees no return to growth in restaurant sales there until the fourth quarter.

Yum shares fell 5.6 percent in after-hours trading, as Wall Street analysts and investors digested the disappointing news from the company that is widely seen as a model for how to do business in the complex Chinese market.

"This is going to take all the experts they have in public relations to stem the tide. I don't think anyone saw this coming," Edward Jones analyst Jack Russo said.

Yum reported a 6 percent drop in fourth-quarter sales at established restaurants in China due to "adverse publicity" regarding chemical residue found in some of its chicken supply.

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

Yum expects China's same-store sales to be down 25 percent for the first quarter, which includes only the months of January and February. It said KFC same-store sales in China should turn up by the fourth quarter.

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, and the region accounts for more half its sales and 40 percent of total operating profit. Its strong reputation for high food quality helped it grow briskly in a country that has been rocked by serious and persistent food safety scandals.   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