UPDATE 5-Yum Brands warns China sales fell more than expected

Mon Jan 7, 2013 10:11pm EST

* Yum says China sales fell 6 pct in Q4 vs 4 pct forecast

* 2012 earnings estimate below Wall Street consensus

* Blames bad publicity from Chinese gov't food safety review

* Yum says its food in China is safe

By Lisa Baertlein

Jan 7 (Reuters) - KFC parent Yum Brands Inc warned on Monday that sales in its top market of China shrank more than expected in the fourth quarter, citing bad publicity from a government review of its chicken supply.

China sales fell 6 percent in the quarter, worse than its earlier forecast of a 4 percent decline, Yum said in a regulatory filing. The media coverage associated with the government's review had a "significant impact" on KFC sales in China in the last two weeks of December, it said.

Yum, which also owns the Taco Bell and Pizza Hut fast-food chains, repeated a full-year earnings forecast that was below Wall Street's expectations and its shares fell more than 5 percent in after-hours trading. The company is due to report quarterly results on Feb. 4.

"We may even see management revisit 2013 guidance over the next month," said Jefferies & Co, which has a 'hold' rating on Yum shares. "We were already below the Street, but have modestly lowered our estimates to better reflect negative China trends in the fourth quarter through early 2013."

Yum has more than 5,100 restaurants in China, which contribute more than half of its overall revenue and operating profits. In addition to the negative headlines around its chicken supply, KFC is also facing tougher competition and a pickier customer base in the country.

At its analyst day in December, Yum forecast mid-single-digit percentage same-restaurant sales growth in China for 2013.

Chief Executive David Novak told investors at that meeting that he was "very confident" the company would turn in "very solid" sales growth in 2013 at established restaurants in China.

Hottovy said he's expecting Yum's China same-restaurant sales to be "modestly" down in the first half of this year before recovering in the second half.

"There's usually a little bit of a lingering effect," he said of food safety issues.

Yum said it still expects 2012 earnings per share, excluding special items, of $3.24. Analysts polled by Thomson Reuters I/B/E/S on average expected earnings of $3.26 per share.

Shares of Yum fell 5.4 percent in after-hours trading to $64.25.

CCTV REPORT

Chinese food safety authorities, which were looking into a report from China Central Television that some of the chicken supplied to KFC contained anti-viral drugs and hormones to accelerate their growth, said in late December that KFC was supplied with chicken that contained excess amounts of antibiotics in 2010 and 2011.

Yum said at the time that it had seen some impact on sales.

Subsequent findings by the Shanghai Food and Drug Administration found the level of antibiotics and steroids in Yum's current batch of KFC chicken supply to be safe, but the watchdog found a suspicious level of an antiviral drug in one of the eight samples tested.

Yum, which competes with Taiwanese-owned fried chicken chain Dicos and Japanese-style noodle chain Ajisen (China) Holdings Ltd, has said the suppliers mentioned in the CCTV report represented a small percentage of the fried chicken chain's product and it had stopped buying chicken from one of those suppliers in August.

"Our food is perfectly safe to eat," spokesman Jonathan Blum said in a statement.

"We regularly audit our suppliers, and if we ever find a supplier in non-compliance, we take immediate corrective action to resolve the issue, including terminating the relationship if that is warranted," Blum said.

China has been trying to stamp out health violations that have dogged the country's food sector amid reports of fake cooking oil and tainted milk. In 2008, milk laced with the industrial chemical melamine killed at least six children and sickened nearly 300,000.

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