October 6, 2015 / 8:51 PM / 5 years ago

UPDATE 3-Yum shares tumble after warning on China, currency moves

(Adds details on China management, link to graphic)

By Lisa Baertlein

Oct 6 (Reuters) - Yum Brands Inc cut its full-year profit forecast on Tuesday, citing a slower-than-expected recovery in its key market of China and the drag from a strong U.S. dollar, sending its shares down 17 percent.

Yum’s challenges in China, its biggest market for profit and sales, appear to be changing from dealing with a food scandal to managing in an economic slowdown.

Sales at China KFC and Pizza Hut restaurants open at least one year rose 2 percent in the latest quarter, less than the 9.6 percent jump analysts expected, according to research firm Consensus Metrix.

The increase in same-restaurant sales ended four straight quarters of declines following a scandal in July 2014 involving expired meat from a minor Yum supplier.

Now Yum faces a slowing economy in China, where this year’s growth is expected to cool to its lowest annual rate in six years.

“The pace of recovery in our China Division is below our expectations,” Chief Executive Greg Creed said in a statement.

A spokesman also said that a marketing misstep at Pizza Hut Casual Dining also contributed to the disappointing China results in the latest quarter.

“Given our lower full-year expectations in China, combined with additional foreign exchange impact, we now expect 2015 (earnings per share) growth to be well below our target of at least 10 percent,” Creed said.

The strong U.S. dollar reduced Yum’s operating profit by $29 million during the third quarter ended Sept. 5. The Louisville, Kentucky-based company gets a significant percentage of its sales from outside of the United States.

Yum’s same-store sales in China took a dive after a television news story in July 2014 alleged that one of its suppliers was using meat that was past its expiration date. Yum quickly ended its relationship with that supplier, which had only a minor role in its China business.

Yum reported third-quarter revenue of $3.43 billion and earnings per share, excluding items, of $1 per share. Both measures fell short of Wall Street’s targets.

Hedge fund Corvex Management has been pressing Yum to spin off its 6,900-restaurant China business, saying it could be worth more than Yum’s share price suggests. Corvex was not immediately available for comment.

In August, Yum said longtime China division leader Sam Su was stepping down and being replaced by company veteran Micky Pant.

Yum shares tumbled to $69.15 in extended trading, after closing at $83.42.

Reporting by Lisa Baertlein in Los Angeles; Editing by Meredith Mazzilli and Richard Chang

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