YUM cuts outlook following Chinese chicken scandal

Yum Brands (YUM) cut its profit outlook for the year, citing a food scare in China involving chicken that pummeled sales at its flagship KFC chain.

The company, based in Louisville, Kentucky, said it now expects earnings per share to rise between 6 and 10% from a year ago, instead of the growth of at least 20% it previously forecast.

Food scare

Earlier this year the company terminated its relationship in China with supplier Shanghai Husi, a division of OSI following an undercover report depicting improper food handling practices.

Even though OSI was a minor supplier, sales at KFC and Pizza Hut were disproportionately impacted. While sales are rebounding, they continue to be negative. Our brands have proven resilient over time and we expect this to be the case with this situation as well, the company said in a statement.

David C. Novak, Chairman and CEO said, “I’m absolutely confident in Yum! Brands’ ability to deliver strong, sustainable growth in the years ahead despite the recent supplier incident in China, which has significantly impacted China sales, leading us to reduce our full-year EPS outlook.

“China sales are on the path to recovery and we expect to develop at least 700 new restaurants in China this year, which we’re confident will ultimately deliver high returns as we further capitalise on the world’s fastest growing consuming class. Outside of China, we expect continued solid sales and profit growth at our KFC division, led by strong international performance and improving US results. At Taco Bell, we’re extremely pleased with restaurant margins of nearly 21% in the quarter and the overall results of our breakfast offering, which has given us a new growth platform to build upon in the years to come. At Pizza Hut, we are making progress with our US turnaround and have major actions in place to drive same-store sales growth balance of year and beyond.

“Overall, our business model is compelling and we firmly believe we are building momentum behind major initiatives around the world that will drive strong sales and profit growth in 2015. We remain focused on the three keys to driving shareholder value: new-unit development, same-store sales growth and generating high returns on invested capital.”