By Lisa Baertlein
Oct 8 KFC parent Yum Brands Inc on
Tuesday warned that it will take longer than expected for its
China restaurant sales to rebound, delaying a recovery in the
market that accounts for more than half of the company's overall
Shares fell 7.5 percent as investors digested the news,
which came after months of Yum executives reassuring investors
that China restaurant sales would return to growth in the fourth
Yum's sales at established restaurants in China have taken a
beating since last December when a social-media fueled food
safety scare over chemical residues in chicken from some of its
suppliers pummeled sales. That was followed by a bird flu
outbreak that destroyed many diners' appetite for poultry.
The Louisville, Kentucky-based company operates more
restaurants in China than any other U.S. brand and said it
remains confident in its business in the world's fastest-growing
"KFC is unquestionably the category leader in China and we
remain confident sales will fully recover," Chief Executive
David Novak said in a statement.
MIDDLE CLASS AUSTERITY?
Yum attributed its China woes to the December scare, but
some analysts suggest that its problems are of a different
nature. They say China's middle-income diners - who flock to KFC
- have cut their spending due to government austerity measures.
KFC also faces stronger competition from local eateries and
the company may have opened too many fried chicken restaurants
in China, those analysts said.
"We are seeing a slowing consumer spending environment in
China," Edward Jones analyst Jack Russo told Reuters. Yum will
"have to continue to run the restaurants really well and get
messaging out there that consumers will be fine coming into the
Yum's China same-restaurant sales fell 11 percent in the
Those sales then dropped a steeper-than-expected 11 percent
in September, which is the first month of the China division's
fourth quarter that wraps up at year-end.
Yum will launch "an aggressive marketing campaign to fully
restore consumer trust in the brand," spokesman Jonathan Blum
told Reuters. He said trust in the KFC brand has improved in
China since last December, but that it wasn't yet fully
Thus far, Yum has culled all but its highest-quality
suppliers. It also is planning a slew of menu items to drive
more sales to KFC restaurants, which account for roughly 4,500
of the company's more than 6,000 restaurants in China.
Blum said Yum executives will elaborate on its new marketing
plans on a conference call on Wednesday morning. He declined to
give a new forecast for a restaurant sales turnaround in China.
Yum's third-quarter net income tumbled to $152 million, or
33 cents per share, from $471 million, or $1 per share, a year
earlier. During the latest quarter, Yum had higher taxes and
booked a charge related to its Little Sheep restaurants in
Excluding items, Yum earned 85 cents a share for the third
quarter - missing analysts' call for a profit of 93 cents per
share, according to Thomson Reuters I/B/E/S.
Based on the disappointing sales results from China, and a
higher than expected full-year tax rate, Yum now expects an
earnings per share decline for 2013 in the high-single to
low-double-digit percentage range. It previously had expected a
mid-single-digit percentage decline in full-year earnings per
share. Both estimates exclude special items.
Shares in Yum fell $5.37 to $66.30 in extended trading.