Yum's profit declines over China chicken scare but beats Wall Street expectations

NEW YORK, N.Y. – Yum Brands reported better-than-expected net income for its first quarter but the parent company of KFC warned that a new strain of bird flu in China is hurting the chicken chain’s efforts to recover from an earlier controversy over its suppliers.

The fast-food company, which also owns Pizza Hut and Taco Bell, 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. That would snap a streak of 11 years of double-digit growth.

Yum Brands Inc., which has 36,000 locations globally, has been reeling from a Chinese TV report in late December that said some KFC suppliers were giving chickens unapproved levels of antibiotics. In the first quarter, Yum saw a 20 per cent decline for China sales.

The chicken issues — and the subsequent sales decline — is particularly troubling for Yum, which gets about 40 per cent of its operating profit from China. Yum is among many companies that are rushing to China, where the middle-class population is growing rapidly and hungry for American fast-food. It’s also the biggest Western fast-food chain in the country with about 5,300 locations, most of them KFC restaurants. That’s more than triple the number of McDonald’s restaurants.

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

The marketing campaign was just starting to yield improvement in Yum’s China sales when a new strain of bird flu was reported toward the end of the quarter, sparking fresh fears about chicken. In April, the company said sales in the country are down about 30 per cent so far.

Executives say they’re nevertheless forging ahead with plans to open another 700 restaurants in the country. They note Yum has overcome troubles in the past, such as a bird flu scare in 2005 that dragged down sales by as much as 40 per cent.

“China is the number one retail growth opportunity in the world,” Blum said. “This is a short-term issue.”

Meanwhile, results in the U.S. were far more promising. Sales at restaurants open at least a year rose 6 per cent at Taco Bell, helped by the introduction of its Doritos Locos Tacos in Cool Ranch flavour. KFC and Pizza Hut also saw sales at established restaurants rise by 1 per cent.

For the quarter, Yum said it earned $337 million, or 72 cents per share. That’s down from the $458 million, or 96 cents per share, a year ago.

Excluding one-time items, the company said it earned 70 cents per share, above the 60 cents per share analysts expected.

Revenue fell 8 per cent to $2.54 billion, below the $2.56 billion Wall Street expected.

Shares of Yum were up 6 per cent at $67.75.