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Yum profit beats even as bird flu batters China sales

The logo of KFC restaurant is reflected on a metal wall at a shopping mall in Beijing, February 26, 2013. REUTERS/Kim Kyung-Hoon
The logo of KFC restaurant is reflected on a metal wall at a shopping mall in Beijing, February 26, 2013. REUTERS/Kim Kyung-Hoon

(Reuters) - KFC parent Yum Brands Inc on Tuesday reported that quarterly profit fell less than Wall Street expected, despite a sharp drop in sales in its top China market, sending the company's shares up nearly 6 percent.

The Louisville, Kentucky-based fast-food company also repeated its earnings forecast for the year, based on the better-than-expected first-quarter results.

Sales at established restaurants in China fell an expected 20 percent during the first quarter and Yum warned that fears surrounding a bird flu outbreak there were continuing to depress sales already struggling to recover from a previous food safety scare.

The fast-food operator reaps more than half of its overall sales in China, where most of its nearly 5,300 restaurants are KFCs.

Still, Yum expects sales to recover in China, where it is on track to add 700 new restaurants this year.

"Historically, the sales impact of Avian flu publicity has initially been dramatic at KFC, but relatively short-lived," Chief Executive David Novak said in a statement.

Yum's first-quarter net income fell to $337 million, or 72 cents per share, from $458 million, or 96 cents per share, a year earlier.

Excluding items, first-quarter earnings were 70 cents per share, 10 cents better than the average of analysts estimates compiled by Thomson Reuters I/B/E/S.

Based on that beat, the company backed its forecast for a mid-single-digit, full-year EPS decline.

DOUBLE WHAMMY

While it is not uncommon for Yum to hit bumps in the road in the world's fastest-growing major economy, it is unusual for the fast-food operator to be grappling with two sales-crushing crises in China at the same time.

The first came in mid-December after the discovery of excessive levels of antibiotics in chicken from two of Yum's suppliers prompted government food safety agencies to probe the company's supply chain. Yum was not fined by food safety authorities, but it suffered a widespread backlash in the mainstream media and on Weibo, the China equivalent of popular U.S. social media site Twitter.

In April, just as the pressure was beginning to ease, reports about a new bird flu outbreak began picking up steam.

Demand for poultry products since then has plummeted and the new strain of bird flu, the H7N9 virus, has infected more than 100 people and killed 22 in China.

Yum stock closed down $1.11 at $64.15 on Tuesday after BofA Merrill Lynch downgraded Yum shares to "underperform." The shares more than recovered in after-hours trading, gaining $3.87 to $68.02.

(Reporting by Lisa Baertlein in Los Angeles. Editing by Andre Grenon)

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