LOUISVILLE, Ky. – Yum Brands Inc. warned that a controversy over the safety of chicken in China could be a drag on the company’s earnings. But it seems the issue has had a bigger impact than previously expected.
Louisville, Ky.-based Yum reported fourth quarter earnings declined 5.3 percent to $337 million or 72 cents per share, down from $356 million, or 75 cents per share a year ago. The earnings per share decline snapped an 11-year streak of double digit growth in EPS. Revenues rose 1 percent to $4.15 billion.
“We delivered full-year 2012 EPS growth of 13 percent or $3.25 per share, excluding Special Items," said David C. Novak, chairman and CEO. This marks the 11th consecutive year we delivered at least 13 percent growth, which puts us in an elite group of high-growth companies.
"We also take satisfaction with our record level of international development in 2012 which lays the foundation for future growth and makes Yum! a leader in emerging market development. With new-unit development at the core of our growth model and the continued rapid expansion of the consuming class overseas, we believe our opportunity for long-term growth has never been better."
Novak said that continued negative same-store sales the company no longer expects to achieve EPS growth in 2013.
“Although we cannot predict how long it will take to restore sales, we are steadfast in our belief that the power and popularity of the KFC brand in China will ultimately drive a full sales recovery," Novak said. "Having weathered other storms in the past, we know that our brands are resilient. As a result, we will stay the course with our target to develop at least 700 new units in 2013 in China to lay the foundation for future growth, and will not let this event detract from our unparalleled China growth opportunity.
“Our growth strategies are unchanged, in China, Yum! Restaurants International, India and the US With our category-leading brands and outstanding people capability, I’m confident we will bounce back strongly and restore our track record of double-digit EPS growth in the years ahead.”
Same-store sales in China sharply declined because of an investigation into suppliers of the company’s KFC stores. The Shanghai Food and Drug Administration launched an investigation into the levels of antibiotics in KFC chicken after the agency found excessive amounts of antibiotics in raw chicken from two KFC suppliers.
In its earnings announcement, Yum said the Shanghai FDA concluded its investigation and provided the company with recommendations aimed at strengthening the company's poultry supply chain practices. The recommendations included voluntary self-testing procedures, improved reporting and communications and enhanced supplier management.
"Our team in China has taken a comprehensive review of our current system and is in the process of incorporating all of the SFDA’s recommendations," the company said. "We have always recognized the importance of building a world-class supply chain in China, which is why we have implemented a wide range of quality assurance and testing practices over the years above legal and regulatory standards. The SFDA’s recommendations will further strengthen those practices.
"The SFDA did not bring a case against Yum! China and no fine was assessed," the company said.
KFC same-store sales declined 8 percent in the fourth quarter and climbed 3 percent for the year.
Pizza Hut Casual Dining same-store sales grew 7 percent in the fourth quarter and 10 percent for the year.
US Division fourth quarter same-store sales increased 3 percent on growth of 5 percent at Taco Bell, 4 percent at KFC and offset by a decline of 1 percent at Pizza Hut. Same-store sales increased 5 percent for the year, including growth of 8 percent at Taco Bell, 3 percent at Pizza Hut and 3 percent at KFC, the company said.
Fourth quarter restaurant margin increased 3.3 percentage points. Restaurant margin increased 4.2 percentage points for the year mostly on strong sales leverage.