Yum! Brands Inc. (YUM:US), owner of the Taco Bell and KFC chains, said fourth-quarter same-store sales fell more than projected in China after a government probe into one of its former suppliers hurt demand.
KFC sales in China in the last two weeks of December had a “significant impact” from “adverse publicity associated with a government review of China poultry supply,” the Louisville, Kentucky-based company said in a filing with the U.S. Securities and Exchange Commission yesterday. China same-store sales fell 6 percent in the fourth quarter, compared with a previous estimate for a decline of 4 percent, according to the filing.
The Shanghai Food and Drug Administration on Dec. 20 said tests conducted by a third-party agency from 2010 to 2011 found found eight batches of chicken supplied to Yum by Liuhe Group Co. had antibiotics levels that didn’t meet prescribed standards. Yum, which operates KFC and Pizza Hut locations in China, got 44 percent of its revenue from the nation in 2011. The company said it stopped all supplies from Liuhe in August.
“Until the company is able to mount a PR campaign that successfully regains the trust of Chinese consumers, sales and EPS are at material risk,” Bryan Elliott, a analyst at Raymond James Financial Inc., said in a research note. He rates the company the equivalent of sell.
The shares dropped (YUM:US) percent 4.2 percent to $65.04 at the close in New York, the biggest decline since Nov. 30. Yum gained 13 percent last year.
“The trust in KFC was so high that now the anger is high,” said Shaun Rein, managing director of China Market Research in Shanghai. “People tend to trust Western brands, they think these brands have better quality control over the supply chain and they are not going to cut corners.”
Food safety is a big worry for many Chinese consumers and it may take at least three to six months for them to start returning to KFC stores, Rein said.
Yum also reported preliminary profit that trailed analysts’ estimates in the filing. Profit excluding some items in 2012 was $3.24 a share, the company said in yesterday’s filing. The average estimate of 25 analysts surveyed by Bloomberg was $3.26 when the filing was released. The company plans to report fourth-quarter and full-year 2012 results on Feb. 4.
Yum in 2011 received negatively publicity in the U.S. when a law firm filed a class-action lawsuit claiming Taco Bell didn’t use enough real beef in its food to label it as such. While Chief Executive Officer David Novak called the claim false and said the restaurant’s seasoned meat is 88 percent real beef, three quarters of same-store sales declines at Taco Bell’s U.S. stores followed. The lawsuit was later dropped.
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