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Yum struggles to recover in China, but beats forecast

NOT SO YUMMY:Fears about bird flu are curbing Yum’s efforts to regain consumers’ trust in China, which was hit by reports of antibiotics in its chicken


A sign shows Yum Brands Inc’s support center at its corporate headquarters in Louisville, Kentucky, on Jan. 18, 2011.

Photo: Reuters

A new strain of avian influenza in China is sabotaging Yum Brands Inc’s efforts to rebuild trust with Kentucky Fried Chicken (KFC) customers following an earlier controversy over its chicken supply.

Yum, which owns KFC, Pizza Hut and Taco Bell, on Tuesday reported a steep decline in its net income as sales in China took a big hit. However, the results were not as bad as analysts feared and its shares gained in aftermarket trading.

The fast-food company, which has 36,000 locations worldwide, has been reeling from a Chinese television report in December last year that said that some KFC suppliers were giving chickens unapproved levels of antibiotics. In the first quarter, Yum saw a 20 percent decline in sales at stores open at least a year in China.

“As anticipated, intense media attention surrounding poultry supply in China significantly impacted KFC sales and profit,” CEO David Novak said in a statement.

The company has been trying to restore confidence with customers using TV ads and in-store signs that underscore the quality of KFC’s chicken in a push called “Operation Thunder.” The name is a reference to the “swift and decisive” action the company is taking, Yum spokesman Jonathan Blum said.

That push was just starting to yield some improvement in Yum’s China sales when a new strain of bird flu was reported at the end of last month, sparking fresh fears about chicken. For this month, the company said sales in the country are down about 30 percent so far.

The chicken issues — and the subsequent sales decline — are troubling for Yum because it previously got about 40 percent of its operating profit from China. Yum is among the many companies that have rushed to China as a way to ensure future growth, given the country’s rapidly expanding middle class, hungry for more convenient foods.

Yum is the biggest Western fast food chain in China with about 5,300 locations, most of them KFC restaurants. That is more than triple the number of McDonald’s restaurants.

Despite the recent troubles, Yum executives say they are forging ahead with plans to open another 700 restaurants in China this year. They add that Yum has overcome troubles in the past, such as a bird flu scare in 2005 that dragged down sales by as much as 40 percent.

Novak on Tuesday said he is confident that the company will return to double-digit earnings per share growth “in 2014 and beyond.”

Meanwhile, the US was a bright spot for the quarter as sales at Taco Bell restaurants open at least a year rose 6 percent, helped by the introduction of its Doritos Locos Tacos in Cool Ranch flavor. KFC and Pizza Hut also saw sales at established restaurants rise by 1 percent.

Yum stood by its full-year forecast for earnings per share to decline in the mid-single digits as a result of its issues in China, which would snap an 11-year-streak of double-digit growth.

For the quarter, Yum said it earned US$337 million, or US$0.72 per share, down from the US$458 million, or US$0.96 per share, posted a year ago.

Excluding one-time items, the company, which is based in Kentucky, said it earned US$0.70 per share, above the US$0.60 per share analysts expected.

Revenue fell 8 percent to US$2.54 billion, below the US$2.56 billion that Wall Street had expected. Yum shares we up 6 percent at US$67.75.

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