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Allegations Dent Yum's Guidance

Zacks Equity Research

Kentucky-based Yum! Brands Inc. (YUM) recently lowered its sales expectations from China. China is the largest contributor to its revenue stream, accounting for nearly 55% of total revenue in the third quarter of 2012.

In a recent SEC filing, management stated that its China division’s same store sales are expected to suffer a 6% decline in the just concluded fourth quarter of 2012. The company had previously projected the same store sales in China to decline 4% in the fourth quarter owing to the steep economic slowdown.

The allegations against the company regarding the quality of chicken supplied to KFC are cited to be the reason for such a dismal outlook. Last month, Shanghai Food and Drug Administration (:SFDA) reported that eight out of 19 chicken batches supplied to KFC, which were sent for examination in 2010 and 2011, contained a very high amount of antibiotic named amantadine.

Moreover, China’s state television CCTV also reported that two poultry farms in the Shandong province of China that supplied chickens to KFC had fed chicken with unapproved levels of antibiotics. The Chinese government’s investigation followed soon after.

After the announcement of this news, the company stated through a SEC filing that it is always highly concerned regarding the safety of its food products and will be assisting the government in the investigations to resolve this problem.

The negative publicity had also led to a steep fall in the company’s sales during the last two weeks of December.

Despite lowering the fourth-quarter revenue projection in China, Yum! Brands reiterated its adjusted earnings per share forecast for 2012 of at least 13% growth or $3.24 per share.

The company faces competition from McDonald’s Corp. (MCD) and Starbucks Corp. (SBUX) in terms of price, service, location and concept.

Yum! Brands currently carries a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.

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