LOS ANGELES — KFC’s parent, Yum Brands, has warned that it expects 2013 earnings to shrink rather than grow as it struggles to manage a food safety scare in China and expects no return to growth in restaurant sales there until the fourth quarter.
Shares of Yum, a fast-food chain operator based in Louisville, Kentucky, fell 5.6 percent in after-hours trading Monday as Wall Street analysts and investors received the disappointing news. The company has been widely seen as a model for how a foreign company can do business in the complex Chinese market.
“This is going to take all the experts they have in public relations to stem the tide,” said Jack Russo, an analyst at the investment firm Edward Jones. “I don’t think anyone saw this coming.”
Overall fourth-quarter net income at Yum, which also operates the Pizza Hut and Taco Bell chains, fell to $337 million, or 72 cents per share, from $356 million, or 75 cents per share, in the same period 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.
Yum reported a 6 percent drop in fourth-quarter sales at established restaurants in China because of “adverse publicity” regarding chemical residue found in some of its chicken supply.
Its China business continued to suffer in January, when same-store sales — revenue from stores open for at least a year — dropped 37 percent, including a 41 percent decline for KFC and a 15 percent decline for Pizza Hut Casual Dining.
Yum said the January data had probably affected by the timing of the Lunar New Year, which fell in January last year. The weeklong holiday period, which is in February this year, typically increases sales at restaurants and other tourist-related sectors.
Still, Yum expects same-store sales in China to be down 25 percent for its financial first quarter for China operations, which includes only the full months of January and February. It said KFC same-store sales in China should perk up by the fourth quarter.
As a result, Yum forecast a “mid-single-digit” percentage decline in earnings per share for 2013. Yum had forecast growth this year in earnings per share of at least 10 percent, and analysts polled by Thomson Reuters I/B/E/S had expected the same.
Yum has nearly 5,300 restaurants in China, mostly KFC locations, and the country accounts for more half its sales and 40 percent 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 investigating the company’s supply chain. The investigations were prompted by a report on China Central Television that found that two of Yum’s suppliers in China had purchased chickens from farmers who used excessive levels of antibiotics in their animals. Yum stopped using one of those suppliers and cut purchases from a problematic plant used by the other.
Although the company was not fined by the Chinese food safety authorities, it has suffered a widespread backlash in the mainstream news media and on microblogs.
A concern for Yum is that its other branded stores in China — including Pizza Hut, Little Sheep hot pot eateries and East Dawning Chinese fast food — may be tarnished by the KFC scandal. In early January, Yum apologized to customers in China over its handling of the food scare. On Monday, it said it would begin an aggressive marketing campaign after the Lunar New Year, which starts Feb. 10, to restore KFC’s brand image.
The company would do well to shake off all corporate “hubris” and fall on its sword, said the branding expert Robert Passikoff, president of Brand Keys. “If your same-store sales are down by more than one-third, something’s not working,” Mr. Passikoff said.
Article source: http://www.nytimes.com/2013/02/06/business/global/kfc-parent-suffers-after-china-scandal.html?partner=rss&emc=rss
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