July 15, 2015 / 5:54 PM / 2 years ago

Yum sticks to growth forecast despite slow China recovery

(Reuters) - KFC and Pizza Hut owner Yum Brands Inc (YUM.N) stuck to its profit growth target for the year despite a slower-than-expected recovery in its Chinese business, which was hit by allegations of a supplier using expired meat last year.

A worker cleans an exterior of a building next to a KFC restaurant in Beijing April 23, 2015. REUTERS/Kim Kyung-Hoon

Shares of Yum, which reported another decline in quarterly sales on Tuesday, recovered some of their earlier losses but were still down 2.6 percent.

The company will need nearly 30 percent earnings growth in the second half of the year to meet its 10 percent EPS growth target, Chief Financial Officer Pat Grismer said in a post-earnings conference call on Wednesday.

“We believe this is achievable,” Grismer said, noting that Yum typically makes 60 percent of its profit in China in the second half of the year.

Analysts on average expect earnings to grow 12.6 percent this year.

To stem the decline in sales, Yum has launched a slew of measures in China that range from new menu items to testing an upmarket diner aimed at customers tired of fried chicken.

The company has added eight new items to its KFC menus for lunch and dinner, including healthier options such as herbal tea and seafood, Chief Executive Greg Creed said on the call.

Yum has also revamped its breakfast menu and rolled out premium coffee at over 2,000 stores in China.

KFC is Yum’s biggest brand in China, accounting for 4,889 of Yum’s 6,853 restaurants in the country at the end of the second quarter.

The initiatives are bearing fruit - same-store sales in China fell 10 percent in the second quarter, compared with a 12 percent decline in the previous quarter.

In the same period last year, comparable sales rose 15 percent, before local TV reports alleged improper meat handling at one of Yum’s suppliers.

Grismer said he expects full-year same-store sales growth in China to be in the low-single digit percentage range. He continues to expect foreign exchange to reduce full-year earnings per share by about 5 percent.

Jefferies analyst Andy Barish, however, is skeptical on Yum exceeding its EPS target for the year.

“Given cost challenges, foreign-exchange headwinds and negative China same-store sales, we believe significant upside to 10 percent growth is unlikely,” he wrote in a note.

Reporting by Subrat Patnaik and Yashaswini Swamynathan in Bengaluru; Editing by Saumyadeb Chakrabarty

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