Yum Brands cuts profit outlook after Chinese food scare

FBN's Lauren Simonetti breaks down Yum Brands' third-quarter earnings report and previews Alcoa's third-quarter earnings estimates.

Yum Brands Books Third-Quarter Earnings Miss

Features Dow Jones Newswires

Yum Brands Inc. said its sales in China fell 14% at restaurants open more than a year during its August quarter, hurt by the latest scare about food safety in the country.

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However, outside China the parent company reported stronger same-store sales at its KFC and Taco Bell divisions.

For the current year, Yum lowered its estimate for per-share earnings growth to between 6% and 10%, from its previous estimate for growth of at least 20%. The company cited expectations that China same-store sales will continue to improve but will be negative during the current quarter.

Yum warned in late July that reports about a Shanghai supplier intentionally selling meat beyond its shelf life to fast-food companies were weighing on sales at its KFC and Pizza Hut locations in China. At the time Yum said that although the Shanghai supplier's owner, U.S.-based OSI Group, wasn't a major supplier to Yum's restaurant chains, its brands had been affected by extensive news coverage.

During the latest quarter, its China division system sales fell 9.5% to $1.84 billion and segment operating profit dropped 40% to $202 million. In China, sales at stores open at least a year fell 14% in the latest quarter, above expectations for a 13% drop, including a decline of 14% at KFC and 11% at Pizza Hut.

In a news release Tuesday, Yum said that while China sales have been recovering, they remain negative. The company also said, "Our brands have proven resilient over time and we expect this to be the case with this situation as well."

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The latest food scare in China--Yum Brands largest market--came as the company had been recovering from concerns related to KFC chicken suppliers in China nearly two years ago.

For the period ended Sept. 6, Yum Brands reported a profit of $404 million, or 89 cents a share, up from $152 million, or 33 cents a share, a year earlier. Excluding refranchising gains, a year-earlier write-down of its Little Sheep casual dining stake in China and other items, earnings rose to 89 cents from 85 cents. Revenue decreased 3.2% to $3.35 billion.

Analysts polled by Thomson Reuters expected per-share profit of 88 cents and revenue of $3.45 billion.

World-wide restaurant margin fell 2.7 percentage points to 14.9%.

Outside China and India, Yum's KFC division system sales rose 6% and operating profit rose 16%. Sales at stores open more than a year increased 4% in emerging markets, 3% in developed markets and 2% in the U.S.

Pizza Hut division system sales were flat, while sales at stores open more than a year fell 1% and operating profit declined 2%. Sales at established stores rose 3% in emerging markets but were offset by declines of 1% in developed markets and 2% in the U.S.

Yum's Taco Bell division, which is mostly in the U.S., reported system sales rose 4% and operating earnings climbed 14%. Breakfast sales drove 3% sales growth at U.S. stores open more than a year.

The company's India division recorded system sales growth of 14%, on stronger volume that was partly offset by a 4% decline in sales at locations open more than a year.

Write to Tess Stynes at tess.stynes@wsj.com

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