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Yum expects big 1Q profit hit from chicken scare

Candice Choi, AP Food Industry Writer

NEW YORK (AP) -- KFC parent company Yum Brands expects a controversy over its chicken suppliers in China to hammer its first-quarter earnings per share by 25 percent but says it plans to forge ahead with its expansion in the country.

The company, which also owns Pizza Hut and Taco Bell, has been reeling from the chicken supplier issue since a December report on Chinese television. The report said suppliers had been ignoring regulations and giving chickens unapproved levels of antibiotics. Yum says a subsequent investigation by Shanghai regulators concluded in Jan. 25, with the company agreeing to adopt stricter oversight of its suppliers.

On Monday, Yum had warned that its earnings per share for 2013 would decline as a result of the issue. That would snap an 11-year streak of profit growth of at least 13 percent.

Yum is the biggest Western fast-food chain in China, with KFC accounting for most of its 5,300 locations in the country. The nation's economic growth had until now been a boon for the company, while its U.S. business was more inconsistent.

But even before the chicken scare, Yum's China business had been slowing, with sales trending negative as early as October. Yum says that weakening was the result of broader economic conditions and tough comparisons from its growth a year earlier. The trends "turned sharply negative" in December after the news report, the company said.

The severity of the supplier issue seems to have taken Yum by surprise, with executives noting in conference call Tuesday that a recent "free beverage and ice cream promotion" had very little impact on stemming the damage.

"The onslaught of negative media coverage has been longer lasting and more impactful than we expected," CEO David Novak said. Although Novak said he expects the KFC brand to recover eventually, he could not say exactly when that would be.

He noted that the company will need the "gift of time" for the controversy to subside, because diners have plenty of other places where they can go to eat. Yum, based in Louisville, Ky., plans to mount a marketing campaign next week, after the Chinese New Year, to begin rebuilding trust.

For the first quarter, sales at restaurants open at least a year are expected to plummet 25 percent in China. That would follow a 6 percent decline in the fourth quarter, which was the first drop since 2009.

To keep investors updated on its efforts, Yum said it will start reporting monthly sales figures until business rebounds.

Novak noted that Yum's expansion plans for China remain intact and that the company continues to see the country as a key market for its long-term success.

As with McDonald's in the U.S., he said that Yum in China plans to be "everywhere that matters" and "have the best locations." In 2013, Yum plans to build 700 restaurants in the country, concentrating more on the second-tier cities outside of Shanghai, Beijing, Guangzhou and Shenzhen.

Novak also noted that Yum has overcome major ordeals in the past, such as an avian flu scare in 2005 that dragged down sales by as much as 40 percent. In 2011, the company was also hit in the U.S. by a lawsuit that alleged Taco Bell beef shouldn't be labeled as such because of its other ingredients. Yum hit back hard against the suit, taking out advertisements defending its products, and the lawsuit was later dropped.