February 4, 2013 11:00 pm

China concerns eat into Yum profits

Yum Brands, owner of the KFC fast-food chain, has forecast a drop in 2013 earnings due to the continued fallout from food safety concerns surrounding its Chinese business.

The Kentucky-based company said it expected a mid-single-digit drop in earnings per share in 2013, as it announced fourth-quarter earnings. Its shares tumbled about 6 per cent in after-market trading.

“Due to continued negative same-store sales and our assumption that it will take time to recover confidence, we no longer expect to achieve EPS growth in 2013,” David Novak, chief executive, warned.

Allegations in December 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 social media network.

Yum last month said same-store sales in China in the fourth quarter, which account for 44 per cent of its total profits and around half of revenues, had fallen 6 per cent.

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. Yum is the country’s leading western restaurant company by sales and number of restaurants.

The company said the “past seven weeks of media attention have been intense and negative towards the KFC brand image”, and meant that same-store sales in China for January and February combined would drop 25 per cent compared with the same period last year.

Jack Russo, analyst at Edward Jones and Co, said Yum would recover but the shares fell sharply as few had expected December’s food safety scare in China to continue into 2013.

“For 10 to 12 years in a row they’ve increased EPS, so for them to say 2013 is going to be down is really a surprise,” he said. “The carry-over impact is really the big story here.”

The company expects same-store sales in China to improve throughout 2013 and see positive growth by the fourth quarter.

Jonathan Blum, chief public affairs officer, said Yum will launch an aggressive marketing plan soon after Chinese New Year next weekend that involves product innovation and working with suppliers to rebuild the brand’s reputation.

“We’ve had adversity before – we always bounce back,” he said. “Our brands are resilient.”

In the fourth quarter, Yum reported earnings of $337m, or 72 cents a share, including exceptional items, compared with $356m, or 77 cents, during the same period last year. Revenues rose 1 per cent year-on-year to $4.15bn.

Excluding special items, Yum saw earnings of 83 cents per share. Wall Street analysts had forecast 82 cents per share on $4.12bn in revenues.

“Although Yum already has begun addressing the concerns with consumers, we would not be surprised if the ongoing media attention has pressured consumer sentiment and [same-store sales] for KFC China in Q1,” David Tarantino, analyst at Baird, said in a pre-earnings note to investors.

For the full year, same store sales in China rose 4 per cent, down from a 19 per cent rise in 2011.

Yum reported full-year earnings of $3.38 per share, including special items, on revenues of $13.63bn, compared with $2.87 per share on $12.63bn in revenues during 2011.

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