By Lisa Baertlein
REUTERS - KFC parent Yum Brands Inc (NYS:YUM - News) on Tuesday warned that it will take longer than expected for its China restaurant sales to rebound, delaying a recovery in the market that accounts for more than half of the company's overall operating profit.
Shares fell 7.5 percent as investors digested the news, which came after months of Yum executives reassuring investors that China restaurant sales would return to growth in the fourth quarter.
Yum's sales at established restaurants in China have taken a beating since last December when a social-media fueled food safety scare over chemical residues in chicken from some of its suppliers pummeled sales. That was followed by a bird flu outbreak that destroyed many diners' appetite for poultry.
The Louisville, Kentucky-based company operates more restaurants in China than any other U.S. brand and said it remains confident in its business in the world's fastest-growing major economy.
"KFC is unquestionably the category leader in China and we remain confident sales will fully recover," Chief Executive David Novak said in a statement.
MIDDLE CLASS AUSTERITY?
Yum attributed its China woes to the December scare, but some analysts suggest that its problems are of a different nature. They say China's middle-income diners - who flock to KFC - have cut their spending due to government austerity measures.
KFC also faces stronger competition from local eateries and the company may have opened too many fried chicken restaurants in China, those analysts said.
"We are seeing a slowing consumer spending environment in China," Edward Jones analyst Jack Russo told Reuters. Yum will "have to continue to run the restaurants really well and get messaging out there that consumers will be fine coming into the restaurants."
Yum's China same-restaurant sales fell 11 percent in the third quarter.
Those sales then dropped a steeper-than-expected 11 percent in September, which is the first month of the China division's fourth quarter that wraps up at year-end.
Yum will launch "an aggressive marketing campaign to fully restore consumer trust in the brand," spokesman Jonathan Blum told Reuters. He said trust in the KFC brand has improved in China since last December, but that it wasn't yet fully restored.
Thus far, Yum has culled all but its highest-quality suppliers. It also is planning a slew of menu items to drive more sales to KFC restaurants, which account for roughly 4,500 of the company's more than 6,000 restaurants in China.
Blum said Yum executives will elaborate on its new marketing plans on a conference call on Wednesday morning. He declined to give a new forecast for a restaurant sales turnaround in China.
Yum's third-quarter net income tumbled to $152 million, or 33 cents per share, from $471 million, or $1 per share, a year earlier. During the latest quarter, Yum had higher taxes and booked a charge related to its Little Sheep restaurants in China.
Excluding items, Yum earned 85 cents a share for the third quarter - missing analysts' call for a profit of 93 cents per share, according to Thomson Reuters I/B/E/S.
Based on the disappointing sales results from China, and a higher than expected full-year tax rate, Yum now expects an earnings per share decline for 2013 in the high-single to low-double-digit percentage range. It previously had expected a mid-single-digit percentage decline in full-year earnings per share. Both estimates exclude special items.
Shares in Yum fell $5.37 to $66.30 in extended trading. (Reporting by Lisa Baertlein in Los Angeles; additional reporting by Phil Wahba in New York; Editing by Phil Berlowitz)