UPDATE 2-Yum says China food safety scare hurting KFC, Pizza Hut sales

Wed Jul 30, 2014 6:35pm EDT

(Adds background and details on McDonald's, Papa John's)

By Lisa Baertlein

July 30 (Reuters) - A television expose showing improper meat handling by one of its Chinese suppliers caused "significant, negative" damage to sales at its KFC and Pizza Hut restaurants over the past 10 days, Yum Brands Inc said on Wednesday.

"If the significant sales impact is sustained, it will have a material effect on full-year earnings per share," Yum said in a regulatory filing.

Shares in Yum, which counts China as its No. 1 market, tumbled 6.2 percent in extended trading, down $4.50 to $68.50.

The latest food safety scandal to rock China came as Yum's restaurant sales there had just begun recovering from a slide last year due to an avian food outbreak and a food safety scare.

In a note titled "Big Trouble in Big China," Janney Capital Markets analyst Mark Kalinowski said McDonald's Corp faces the next most risk after Yum. He also noted that Papa John's International Inc operates company-owned restaurants in the Beijing area.

After an undercover local TV report that alleged workers at Shanghai Husi Food Co Ltd used expired meat and doctored food production dates, regulators closed the factory on July 20. The plant is part of OSI Group LLC, a U.S. food supplier. Police have detained five people including Shanghai Husi's head and quality manager.

Yum, which has nearly 6,400 restaurants in China, immediately terminated its global relationship with OSI, which was not a major supplier to the company. It said the move had "minimal disruption" to the availability of menu offerings in China.

Food safety has been a big concern for Chinese consumers after dairy products tainted with the industrial chemical melamine sickened many thousands and led to the deaths of six infants in 2008.

McDonald's, which has just over 2,000 restaurants in China, has had a long relationship with OSI and was more dependent on the supplier that Yum.

Many of those restaurants were hit by meat shortages after McDonald's ended its relationship with OSI in China.

McDonald's Holdings Co, the Japanese unit of the world's biggest restaurant chain, withdrew its earnings guidance for the year after the scandal forced it to switch to alternative chicken supplies. A McDonald's Japan executive said sales had dropped 15 percent to 20 percent due to the food scare.

(Reporting by Lisa Baertlein in Los Angeles and Sruthi Ramakrishnan in Bangalore; Editing by Don Sebastian, Cynthia Osterman and Lisa Shumaker)