Yum Brands Q4 Profit Declines 5% as Chicken Scare Hurts China Sales

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By Jerin Mathew | February 5, 2013 6:25 PM EST

A woman walking past a KFC restaurant in Wuhan, Hubei province

Yum Brands, parent company of KFC, Pizza Hut and Taco Bell food brands, has reported a 5 percent decline in profit for the fourth quarter as the company's China sales were hurt by adverse publicity regarding its poultry supplies.

The company also warned that its 2013 earnings would shrink due to the food safety scare in China, and it sees no recovery in restaurant sales in one of its biggest markets until the fourth quarter of 2013.

In after-hours trading, Yum shares fell more than 5 percent following the result.

Net income for the quarter fell to $337m (£214m, €250m), or $0.72 per share, from $356m, or $0.75 per share, a year ago. Excluding special items, Yum had a profit of $0.83 per share.

The company's China sales have declined by 6 percent in the quarter, despite an increase in total revenue to $4.15bn from $4.11bn. China division KFC same-store sales turned sharply negative during the last two weeks of December as a result of adverse publicity regarding chemical residue found in its chicken supply.

Yum operates more than 4,200 KFC restaurants in China, as well as about 800 Pizza Huts. The company's China operations, especially at its KFC outlets, came into limelight after a TV report, which revealed that some of the company's suppliers are using excessive levels of antibiotics in chicken.

The report prompted an investigation by the Shanghai FDA (SFDA) into poultry supply management at Yum China. The SFDA identified issues and provided "supervisory recommendations" to the company, without bringing a case and assessing fines.

For the first quarter of 2013, the company expects China's same-store sales to be down 25 percent. Consequently, earnings per share are expected to decline by a "mid-single digit" percentage in 2013. Earlier, Yum had forecast 2013 earnings per share growth of at least 10 percent.

"Due to continued negative same-store sales and our assumption that it will take time to recover consumer confidence, we no longer expect to achieve EPS growth in 2013," CEO David Novak said in a statement.

Despite the setbacks, Yum expects to open 700 new restaurants in China, where it looks to expand aggressively.

"Although we cannot predict how long it will take to restore sales, we are steadfast in our belief that the power and popularity of the KFC brand in China will ultimately drive a full sales recovery," Novak said.

For the full-year 2012, Yum reported a 22 percent jump in profit to $1.6bn, up from $1.3bn a year earlier.

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