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Yum Cuts Profit Forecast as China Food Scare Hurts Sales

Published on Oct 8 2014 12:56 PM in Food

Yum Cuts Profit Forecast as China Food Scare Hurts Sales

Yum Cuts Profit Forecast as China Food Scare Hurts Sales

Yum! Brands Inc., owner of the KFC and Taco Bell fast-food chains, reduced its forecast for profit this year as another food-supplier probe hurts sales in its China division.

Earnings per share, excluding special items, will rise 6 per cent to 10 percent this year, the Louisville, Kentucky-based company said in a statement yesterday. That’s down from a previous projection for growth of at least 20 per cent.

Yum, which has more than 6,400 restaurants in China, has been under pressure after a second food-safety scare drove customers away from its KFC and Pizza Hut chains there. The fast-food company also is struggling in the US, where Pizza Hut is trying to compete with peers offering steep discounts and new items.

“The main story was China” and the food scandal there, said Efraim Levy, a New York-based equity analyst at S&P Capital IQ. “That’s going to hurt them for a while.”

Third-quarter net income more than doubled to $404 million, or 89 cents a share, from $152 million, or 33 cents, a year earlier, the company said. Excluding some items, profit was 87 cents a share. Analysts projected 83 cents, the average of 16 estimates compiled by Bloomberg. Revenue fell 3.2 per cent to $3.35 billion, missing analysts’ $3.37 billion average projection.

Yum slumped 7.8 per cent this year through yesterday’s close, while the Standard & Poor’s 500 Restaurants Index retreated 3.1 per cent.

Supplier Probe

Same-store sales fell 14 per cent in China in the quarter. The company in September reported a preliminary decline of about 13 per cent after supplier OSI Group LLC was investigated for altering expiration dates on food. The company terminated its relationship with OSI after the probe and has said it will take legal action against the supplier and its subsidiary Shanghai Husi.

“It is difficult to confidently forecast the exact trajectory of China sales,” Yum said in yesterday’s statement. “Sales typically take six to nine months to recover from these types of events.”

In the US, Yum’s Taco Bell brand has been attracting customers with new protein-heavy fare and a menu of items priced at $1. The Mexican-food chain introduced the Dollar Cravings line-up in August with fare including mini quesadillas and cinnamon twists. The company has more than 6,100 Taco Bell locations. Sales at Taco Bell locations open at least a year rose 3 per cent in the third quarter, while comparable-store sales for Pizza Hut in the US declined 2 per cent. KFC’s same-store sales advanced 3 per cent, and the company’s revenue by that measure fell 4 per cent in India.

Comparable-store sales are considered an indicator of a retailer’s performance because they include only older, established locations.

Beginning next year, Greg Creed will take over as Yum’s chief executive officer when David Novak becomes executive chairman. Creed has led Taco Bell since early 2011.

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