Photographer: Daniel Acker/Bloomberg

Yum Plunges After Sluggish Sales in China Drag Down Earnings

  • Fallout from supplier scandal hurting sales at KFC, Pizza Hut
  • Company lowers full-year profit forecast after revenue miss

Yum! Brands Inc., owner of the KFC, Pizza Hut and Taco Bell chains, suffered its worst stock decline in almost 13 years after missing third-quarter profit estimates, hurt by a lingering slump in China.

Same-store sales rose 2 percent in China, the company said in a statement Tuesday. Analysts projected an increase of 9.6 percent, according to Consensus Metrix. Earnings amounted to $1 a share in the period, excluding certain items. That fell short of an average estimate of $1.06.

Yum, which gets more than half its revenue from China, has been coping with the fallout from a food-supplier investigation, as well as a slowing local economy. So far, a revamped menu focusing on breakfast and healthier foods at KFC, which has about 4,900 locations in the country, hasn’t been enough to bring back consumers.

“The pace of recovery in our China division is below our expectations," Chief Executive Officer Greg Creed said in the statement. The company now expects full-year earnings to be “well below” its prior forecast for growth of at least 10 percent, he said.

Yum’s stock fell as much as 19 percent to $67.79 in New York, the biggest intraday drop since October 2002. Before the tumble, the shares had risen 15 percent this year, closing at $83.42 on Tuesday.

Supplier Incident

Yum has been trying to convince Chinese consumers that its food is safe to eat after a scandal involving a supplier accused of using outdated meat. That vendor, part of Aurora, Illinois-based OSI Group, also supplied McDonald’s Corp. and other fast-food chains.

The latest results suggest that Yum’s problems are also tied to the state of the economy, said Jennifer Bartashus, an analyst at Bloomberg Intelligence.

"It’s easy to blame just the supplier incident, but at the same time China’s economy is slowing," she said. "That inevitably has some impact on the consumer."

Annual Forecast

Yum, based in Louisville, Kentucky, now expects earnings to grow by a percentage in the low single digits this year.

The company also has been shaking up management in Asia. In August, it named Micky Pant to the head of the China business. Pant succeeds Sam Su, who will be an executive adviser through February next year. Joey Wat became head of KFC in China, while Peter Kao was tapped to lead Pizza Hut there.

Yum’s total revenue rose to $3.43 billion last quarter, which ended Sept. 5. Analysts had estimated $3.66 billion, according to data compiled by Bloomberg.

The company’s Taco Bell chain remained a bright spot in the U.S., where it’s now offering breakfast items and opening urban locations that sell alcohol. Still, even that division fell short of predictions. Same-store sales rose 4 percent at the Mexican-food chain, compared with an estimated 4.3 percent.

Comparable-store sales gained 3 percent at KFC and 1 percent at Pizza Hut. They fell 18 percent in India, where Yum has about 800 locations.

Despite the sales slowdown in China, Yum has continued its rapid pace of restaurant expansion. The company opened 108 new units there in the quarter.

“Given the slow pace of the recovery, it makes you wonder why they’re not easing back on that,” Bartashus said. “People will question whether that’s the right strategy.”

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