KFC parent Yum Brands Inc (YUM.N) on Monday warned that sales in its top market of China shrank more than expected in the fourth quarter, citing bad publicity from a government review of that country's chicken supply.
Yum said in a regulatory filing on Monday that China sales fell 6 percent in the quarter, compared to its earlier forecast of a 4 percent decline. It said 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.
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.
The company, 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.
"It's not overly surprising," Morningstar analyst RJ Hottovy said of Yum's China sales warning, which followed a December 21 securities filing alerting investors that "recent publicity (over the government's review) has resulted in moderate sales impact the past few days."
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" that the company would turn in "very solid" sales growth next year 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. Yum said it would report quarterly results on February 4.
Chinese food safety authorities said in late December that KFC was supplied with chicken that contained excess amounts of antibiotics, and the company said at the time that it had seen some impact on sales.
The finding by the Shanghai Food and Drug Administration (SFDA) dealt a blow to KFC's reputation in China, where it is facing fierce competition from the likes of Taiwanese-owned fried chicken chain Dico and Japanese-style noodle chain Ajisen (China) Holdings Ltd (0538.HK).
Yum told Reuters it continues to cooperate with the SFDA's review of two poultry suppliers who provided chicken with unapproved levels of antibiotics to KFC. The company said those suppliers represented a small percentage of the fried chicken chain's product.
According to media reports, Yum stopped buying chicken from one of those suppliers in August. The company did not say whether it was still sourcing from either firm.
"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.
(Reporting By Lisa Baertlein; Writing by Ben Berkowitz; Editing by Gary Hill, Bernard Orr)