Yum Brands Inc.'s operations in China, battered by food safety
issues, again dragged down results in the latest quarter.
China accounts for about half of Yum's sales and is at the
center of the company's expansion plans, but sales have been
crippled by reports questioning the quality of its food. In June,
the Louisville, Ky., company said it is suing rival companies in
China for spreading false information, including photos of chickens
with six wings and eight legs.
Those reports followed similar reports last summer that a KFC
supplier had intentionally sold expired meat and, in late 2012,
that another KFC supplier used growth hormones and antibiotics to
make chickens grow faster.
In the June quarter, sales in China fell 4%, with sales at
stores open for at least a year declining 10%. Yum had already
warned results would be worse than the year-ago period, which
preceded the negative news reports on the sale of expired meat. The
results, however, suggest a continued rebound. Yum reported a 16%
decline of sales at established stores in the fourth quarter and a
12% decline in the first quarter.
To improve sales in China, Yum revamped its marketing and menus,
including adding premium coffee and healthier alternatives like
herbal tea and seafood at KFC restaurants. And the company opened
Atto Primo, a high-end Italian restaurant, in Shanghai's Bund, the
city's historic waterfront. A Yum spokeswoman told The Wall Street
Journal Atto Primo "may serve as an innovation lab for Pizza
Hut."
Chief Executive Greg Creed has dismissed talk of selling its
Chinese operations, saying the company remains on track to open at
least 700 restaurants there this year, just shy of the 737 units
opened last year and accounting for about a third of the company's
planned 2,100 restaurants abroad, with rebounding sales in China
driving the company's projected 10% increase in share-based
earnings before special items.
However, rumors of a spinoff—where a unit becomes a separate
company—or spinout—where the unit is sold to another company—
persist, fueled by the unit's continued drag and low interest rates
that could help finance a deal.
Overall, Yum reported profit of $235 million, or 53 cents a
share, down 30% from $334 million, or 73 cents a share, a year
earlier. Excluding special items, earnings fell to 69 cents a share
from 73 cents a year earlier.
Revenue, which includes franchise and license fees, fell 3% to
$3.11 billion. Currency-rate exchanges lowered revenue by $22
million, Yum said.
Analysts surveyed by Thomson Reuters projected 63 cents a share
on $3.19 billion in revenue.
Worldwide sales rose 3%, while restaurant margin remained at
15.5%.
By brand, sales rose 9% at Taco Bell, 6% at KFC and 1% at Pizza
Hut.
Shares, which have outperformed the S&P 500 by nearly 24
percentage points this year, fell 1.2% to $90.80 in late
trading.
Write to Maria Armental at maria.armental@wsj.com
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