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Weakness in China Hurts Yum Brands, Profits Slip 5.3% (YUM)

Tuesday, February 5, 2013 4:24 AM
Yum BrandsFast food chain, Yum! Brands Inc. (NYSE: YUM) reported late on Monday that its fiscal fourth-quarter profits fell 5.3% as same-store-sales in China were impacted by sluggishness in the economy, higher food costs and Chinese government’s assessment of chicken supplies in the country which brought negative publicity for its KFC brand. The Company also warned that earnings per share growth (EPS) is very unlikely in this fiscal as same-store-sales are expected to decline in China and it will take some time to win over consumers’ confidence, Yum Brands said. Shares slumped 4.6% in aftermarket trading on Monday. For the fiscal 2013, Yum Brands expects earnings to decline by mid single digit percentage point. While EPS in the first half of fiscal 2013 is expected to drop significantly, it is expected to grow in the second half of the current fiscal. “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,” said Chairman and Chief Executive David C. Novak to analysts and investors in a conference call. Yum Brands, which is parent company of three globally renowned brands such as KFC, Pizza Hut and Taco Bell, has seen its domestic business picking up with comparable-store-sales witnessing steady growth since previous four quarters, thanks to improving macroeconomic environment and some new introductions such as Doritos Locos Tacos at Taco Bell. Even though operating earnings in the domestic business slipped 5.8%, same-store sales rose 3% in the fourth quarter. China, which accounts for nearly half of company’s entire annual profits, remains a cause for concern. Same-store sales in China plunged 6%, as poor publicity the chicken industry received following government’s review of China poultry supplies dented Yum Brands’ KFC operations in China during the last two weeks of December. On consolidated basis, Yum reported net profit of $337 million or 72 cents a share, compared with $356 million or 75 cents a share, in the year-earlier quarter. After excluding onetime expenses adjusted earnings or non-GAAP earnings rose to 82 cents a share. Revenue during the period rose 1% to $4.14 billion. Analysts’ consensus estimate was for earnings of 82 cents a share on revenue of $4.12 billion, according to a data compiled by Thomson Reuters.  

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