January 8, 2013 12:19 am

Yum licking its wounds in China

Shares in Yum Brands fell in after-market trading on Monday after the owner of the KFC fast-food chain warned that a controversy surrounding its Chinese operations would hit fourth-quarter earnings.

“Due to adverse publicity associated with a government review of China poultry supply – and the corresponding significant impact on KFC China sales during the last two weeks of December,” same-store sales fell 6 per cent during the fourth quarter, Yum said in a US Securities and Exchange Commission filing.

Yum had previously forecast a quarterly 4 per cent drop in same-store sales at its KFC outlets. Yum’s shares fell more 5 per cent in after-market trading.

China accounts for around half of Yum’s profits and revenues and is expected to generate $1bn in operating income in 2012. It is also China’s leading western restaurant company by sales and number of restaurants.

Allegations last month that Yum’s suppliers had injected growth hormones and antiviral drugs into chicken beyond food safety limits sparked outrage, with some consumers calling for a boycott on Sina Weibo, the popular microblogging site.

Fast food consumption in China has grown rapidly in recent years, with western groups, including KFC and McDonald’s, enjoying a reputation for quality ingredients. That made the allegations against Yum particularly damaging.

In late November, when the Kentucky-based company warned that same-store China sales would fall 4 per cent – the first quarterly decline since 2009 – Yum’s shares fell more than 10 per cent. Same-store sales rose nearly 20 per cent in 2011 compared to the year prior.

Analysts have questioned why the company’s performance has deteriorated while other groups, such as Starbucks, continued to see growth in sales and a time when China’s economy improved after a period when growth fell.

Weiwei Chen, chief financial officer of Yum’s China business, said in December that Beijing’s plan to double per capita income in China was expected to bring 600m more people into the consumer class, increasing demand for fried chicken and pizza.

The company, which will report its fourth quarter and full-year results on February 4, said in its filing with the SEC that it expects earnings per share, excluding special items, to be $3.24.

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