Wednesday February 6, 2013
Yum stumbles badly in China, sees further slide
shanghai: KFC parent Yum Brands Inc has warned 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.
The company's shares fell 5.6% in after-hours trading, as Wall Street analysts and investors digested the disappointing news from the company that has been 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% 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%, including a 41% fall for KFC and a 15% decline for Pizza Hut Casual Dining.
The January data was likely affected by the timing of the Lunar New Year holidays, which fell in January last year, Yum said. The week-long holiday period, which will occur in February this year, typically boosts sales at restaurants and other tourist-related sectors.
Still, Yum expects China's same-store sales to be down 25% for the fiscal first quarter, which includes only the full 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%, 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% 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.
Yum's China sales first took a hit in mid-December when government food safety agencies began probing the company's supply chain. The investigations were prompted by a report on China Central Television, which found that two of Yum's suppliers purchased chickens from farmers who used excessive levels of antibiotics in their animals.
Yum stopped sourcing from one of those suppliers and cut purchases from a problematic plant used by the other. Reuters