Yum cuts FY profit forecast as food scare hits sales

A woman holding an ice cream walks out of a KFC restaurant in Beijing July 17, 2014. [Photo/Agencies]

Yum Brands Inc, owner of the KFC and Taco Bell fast-food chains, reduced its forecast for profits this year as a food-supplier probe in July hurt sales in its China division.

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

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. KFC had previously been hit hard by a December 2013 report that some of its suppliers violated rules on drug use in chickens.

The company also is struggling in the US, where Pizza Hut is competing with peers offering steep discounts and new items.

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But "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 percent to $3.35 billion, missing analysts' $3.37 billion average projection.

Yum slumped 7.8 percent this year through Tuesday's close, while the Standard & Poor's 500 Restaurants Index retreated 3.1 percent.

Same-store sales fell 14 percent in China in the quarter. The company in September reported a preliminary decline of about 13 percent after supplier OSI Group LLC was investigated last summer 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 its 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 a menu of items priced at $1.

The Mexican-food chain introduced the Dollar Cravings lineup 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 percent in the third quarter, while comparable-store sales for Pizza Hut in the US declined 2 percent.

KFC's same-store sales advanced 3 percent, and the company's revenue by that measure fell 4 percent in India.