Yum to Introduce New China Ads After Lowering Forecast

Yum! Brands Inc., owner of the KFC and Pizza Hut dining chains, will introduce a new advertising campaign to lure consumers in China after a probe into its chicken suppliers hurt sales in the Asian nation.

The “aggressive” marketing strategy to restore consumer confidence will start after the Chinese New Year ends, Chief Executive Officer David Novak said during a conference call today. Diners expect safe food, and Yum let them down, he said.

Yum, which plans to open 700 stores in China this year, has been trying to win back Chinese consumers after a former chicken supplier was found to have supplied meat with too much antibiotics. Sales at locations open at least 12 months in the Asian nation fell 6 percent in the fourth quarter, the first quarterly drop in three years. Analysts forecast a decline of 6 percent, the average of 22 estimates from Consensus Metrix.

“They’re going to have to do everything they can to restore their image” in China, Jack Russo, a St. Louis-based analyst at Edward Jones & Co. who advises holding Yum shares, said in an interview. “It’s going to take some money to restore the confidence of consumers there, and I think they’ll get that done.”

Comparable-store sales in China may decline 25 percent in the first quarter, Chief Financial Officer Patrick Grismer said on today’s call. The company will report monthly same-store sales for the Asian nation until KFC recovers, he said. Yum’s first-quarter profit excluding certain items also will fall 25 percent, he said.

Shares Slide

Yum slid 2.9 percent to $62.08 at the close in New York. The Louisville, Kentucky-based company’s shares gained 13 percent last year, while the Standard & Poor’s 500 Restaurants Index dropped 2.6 percent.

Profit excluding certain items will decline this year, down from a previous estimate for growth of 10 percent, the company said yesterday in a statement. Profit last year was $3.25 a share. Analysts on average estimated 2013 profit of $3.57 a share.

The company got about 44 percent of 2011 revenue from stores in China. KFC sales during the quarter were “significantly” affected by the government investigation, which showed that poultry farmers ignored laws, Yum said in yesterday’s statement.

The Shanghai Food and Drug Administration, which didn’t bring a case against Yum or fine the company, concluded its investigation on Jan. 25, Yum said.

Liuhe Group

The Chinese government said on Dec. 20 that tests conducted by a third-party agency from 2010 to 2011 found eight batches of chicken supplied to Yum by Liuhe Group had antibiotics levels that didn’t meet prescribed standards. Yum stopped buying from Liuhe in August, the restaurant chain said in its microblog.

Net income in the quarter ended Dec. 29 fell 5.3 percent to $337 million, or 72 cents a share, from $356 million, or 75 cents, a year earlier, Yum said in the statement. Excluding certain items, profit was 83 cents. Analysts estimated 82 cents, the average of 24 projections compiled by Bloomberg.

Same-store sales rose 3 percent in the U.S., 24 percent in India and 3 percent at other international stores. Analysts estimated growth of 3 percent for the U.S., 6.3 percent for India and 3.9 percent at international locations, according to Consensus Metrix, a researcher owned by Wayne, New Jersey-based Kaul Advisory Group.

Comparable-store sales are considered an indicator of growth because they include only established locations.

McDonald’s Competition

In the U.S., Yum has been advertising value items to compete with McDonald’s Corp.’s dollar menu and attract budget-conscious consumers. Taco Bell has promoted a 12-pack of tacos, while Pizza Hut is advertising $10 for any pizza and $19.99 for a so-called big dinner box.

Revenue rose 1 percent to $4.15 billion in the quarter. Analysts estimated $4.12 billion, on average.

Yum has about 38,200 restaurants worldwide, of which about 20 percent are owned by the company.

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