Yum forecasts profit decline in 2013 amid concerns of chicken supplier in China

NEW YORK, N.Y. – Yum Brands warned Monday that it expects its profit for the year to decline as the parent company of KFC, Pizza Hut and Taco Bell continues to reel from a controversy over its chicken suppliers in China.

A drop in 2013 would snap an 11-year streak of profit growth of at least 13 per cent.

The company, based in Louisville, Kentucky, gave the grim forecast after its profit in the fourth quarter fell 5 per cent, with a key sales figure in China dropping. For January and February, the company expects sales at restaurants open at least a year in China to plummet 25 per cent.

Since an investigation aired on national Chinese television on Dec. 18, Yum has been dealing with an “onslaught of negative media attention” over its chicken suppliers, spokesman Jonathan Blum said. The TV station had reported that Yum’s suppliers were ignoring regulations and giving chickens unapproved levels of antibiotics.

A government investigation into the issue was concluded on Jan. 25 and Yum has agreed to adopt measures to strengthen its oversight of suppliers. But the company says it will take time to recover.

“Our primary emphasis now is to rebuild consumer confidence and sales in China,” Blum said, noting that the company plans to mount a “brand reputation” campaign in coming weeks.

Even though Yum has far more locations in the U.S., its restaurants in China are far more profitable because the cost of doing business there is lower and there’s much more room for growth. Already, Yum is the biggest Western fast-food chain in the country with KFC accounting for most of its 5,300 locations. The nation’s economic growth had until now been a boon for Yum, helping it register a streak of growth for more than a decade.

Although the investigation into chicken suppliers didn’t focus solely on KFC, Blum said that the chain was hit especially hard because it’s the biggest chicken chain in the country. He noted that the negative media attention had been slowing, but that the earnings results could stir up more bad publicity.

For the fourth quarter, a key sales figure fell 6 per cent in China, in line with the decline the company had forecast last month. It marked the first decline in the region since 2009. A year ago, the figure had increased 19 per cent.

For the period ended Dec. 29, Yum said net income fell to $337 million, or 72 cents per share. That’s compared with $356 million, or 75 cents per share, a year ago. Not including one-time items, it earned 83 cents per share.

Revenue rose 1 per cent to $4.15 billion.

Analysts expected a profit of 82 cents per share on revenue of $4.13 billion, according to FactSet.

The U.S. was a bright spot for the company, with sales at restaurants open at least a year up 3 per cent in the quarter, driven by a 5 per cent increase at Taco Bell and a 4 per cent increase at KFC. At Pizza Hut, the figure fell 1 per cent.

For all of 2012, sales at restaurants open at least a year rose 4 per cent in China and 5 per cent in the U.S. Yum said it opened 1,976 restaurants for the year, including 889 new units in China.

Its shares slid 5 per cent to $60.36 in after-hours trading.