* 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
* Says its food in China is safe
By Lisa Baertlein
Jan 7 KFC parent Yum Brands Inc 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 Dec. 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
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 Feb. 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.
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
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.