Yum profits eaten into by China concerns

A KFC is pictured in China on January 9, as customers said they would patronise it despite a food safety investigation.

Story highlights

  • Yum Brands, owner of KFC, forecast drop in 2013 earnings due to fallout from food safety concerns in China
  • Allegations in December that Yum's suppliers injected growth hormones, antiviral drugs into chicken beyond safe limits
  • Last month, Yum reported same-stores sales in China fell 6%

Yum Brands, owner of the KFC fast-food chain, forecast a drop in 2013 earnings as a result of the fallout from food safety concerns surrounding its Chinese business, sending shares tumbling about 6 per cent in after-market trading.

The Kentucky-based company said it expected a mid-single-digit drop in earnings per share in 2013 from the year before, as it announced fourth-quarter earnings below expectations.

David Novak, chief executive, said in a statement that he was confident the company could continue to achieve double-digit earnings growth over the long term.

"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," he warned, however.

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

"For ten to twelve 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."

Last month, Yum reported that same-stores sales in China, which accounts for 44 per cent of its total profits and around half of its revenues, had fallen 6 per cent

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.

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.

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.

The results were well below Wall Street consensus of 82 cents per share on $4.12bn in revenues.

Last November, when it warned that same-store China sales would fall 4 per cent in the fourth quarter -- the first quarterly decline since 2009 -- Yum's shares fell more than 10 per cent.

Analysts said before the earnings release that the poultry issue was likely to extend into the first quarter.

"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 year-on-year, compared to a 19 per cent rise in 2011.

For the full year, the company reported earnings of $3.38 per share, including special items, on revenues of $13.63bn, compared to $2.87 per share on $12.63bn in revenues during 2011. That beat analyst expectations of $3.24 per share on $13.59bn in revenues.

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