Yum! Brands Hurt by KFC Problems in China

Things aren't so yummy in China these days for Yum! Brands, in the wake of bad publicity for its Ken…

Things aren't so yummy in China these days for Yum! Brands, in the wake of bad publicity for its Kentucky Fried Chicken franchise there. It reported that lower sales in China hurt its
fourth-quarter earnings and that the decline is expected to carry into this year.

Same-store sales in China, where Yum! Has 4,200 KFC outlets and 800 Pizza Huts, declined six percent in the fourth quarter of 2012, after media reports that excessive antibiotics and hormones were found in some KFC chicken products. Chinese government food regulators are investigating.

The negative trend at KFC accelerated during the final two weeks of December, when negative publicity turned sales "sharply negative," the company admitted, and it expects the problems will persist well into the new year, leading to a mid-single-digit decline in earnings per share in 2013.

"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," said CEO David Novak. China has been an increasingly important market for the parent company of Taco Bell, KFC and Pizza Hut. Yum has placed big bets on future growth in the world's second largest economy.

"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 added. "Having weathered other storms in the past, we know that our brands are resilient. As a result, we will stay the course with our target to develop at least 700 new units in 2013 in China to lay the foundation for future growth, and will not let this event detract from our unparalleled China growth opportunity."

The company's fourth-quarter net income fell to $337 million, or 74 cents per share, from $356 million, or 77 cents per share, a year earlier. Revenue for the quarter rose to $4.15 billion from $4.11 billion a year ago. For the year, the company's net income rose to $1.6 billion, or $3.38 per share, from $1.32 billion, or $2.81 per share, in 2011. The company's revenue for the year rose to $13.63 billion from $12.63 billion.