Yum's China woes slam sales and profits

By Lisa Baertlein

REUTERS - KFC parent Yum Brands Inc on Monday warned that it expects 2013 earnings to shrink rather than grow, as it grapples with a food safety scare in China where it makes more than half of its overall revenue.

Yum shares fell 6 percent in after-hours trading, as the news was even worse than expected by the analysts, who have largely stuck by the company in recent months.

Yum, which gets more than half of its overall sales and operating profit from China, reported a 6 percent drop in fourth-quarter sales at established restaurants in China due to "adverse publicity" regarding its poultry supply.

Its business there continued to suffer in January, when China same-store sales dropped 37 percent, including a 41 percent fall for KFC and a 15 percent decline for Pizza Hut Casual Dining.

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 percent, 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. Its strong reputation for high food quality helped it grow briskly in a country where there have been some serious food safety scandals.

But the company was shaken by revelations that two of its poultry suppliers purchased chicken from farmers who used excessive levels of antibiotics in their animals. While the company was not fined by food safety authorities, it has suffered a huge backlash on social media in the country.

"I don't think anybody saw this coming," said Edward Jones analyst Jack Russo, who like many others expects the company to eventually bounce back. "Investors are definitely going to need some patience."

The company said it expected a same-store sales decline of 25 percent for January and February combined for its China business. It also said KFC same-store sales in China should turn positive by the fourth quarter.

Yum said it still planned to develop 700 new units in China this year and that it would begin an aggressive marketing campaign to restore KFC's brand image.

Yum's fourth-quarter net income fell to $337 million, or 72 cents per share, from $356 million, or 75 cents per share, a year earlier.

Excluding special items, Yum had a profit of 83 cents per share. That topped analysts' average estimate by a penny, according to Thomson Reuters I/B/E/S.

Total revenue rose to $4.15 billion from $4.11 billion.

Through Monday's close, Yum shares were down 14 percent from late November, when they hit an all-time high, but then sank on the initial China sales warning.

(Reporting By Lisa Baertlein in Los Angeles; Editing by Leslie Gevirtz)