Yum warns of delay in China sales recovery

MIDDLE CLASS AUSTERITY?

Yum attributed its China woes to the December scare, but some analysts suggest that its problems are of a different nature. They say China's middle-income diners - who flock to KFC - have cut their spending due to government austerity measures.

KFC also faces stronger competition from local eateries and the company may have opened too many fried chicken restaurants in China, those analysts said.

"We are seeing a slowing consumer spending environment in China," Edward Jones analyst Jack Russo told Reuters. Yum will "have to continue to run the restaurants really well and get messaging out there that consumers will be fine coming into the restaurants."

Yum's China same-restaurant sales fell 11 percent in the third quarter.

Those sales then dropped a steeper-than-expected 11 percent in September, which is the first month of the China division's fourth quarter that wraps up at year-end.

Yum will launch "an aggressive marketing campaign to fully restore consumer trust in the brand," spokesman Jonathan Blum told Reuters. He said trust in the KFC brand has improved in China since last December, but that it wasn't yet fully restored.

Thus far, Yum has culled all but its highest-quality suppliers. It also is planning a slew of menu items to drive more sales to KFC restaurants, which account for roughly 4,500 of the company's more than 6,000 restaurants in China.

Blum said Yum executives will elaborate on its new marketing plans on a conference call on Wednesday morning. He declined to give a new forecast for a restaurant sales turnaround in China.

Yum's third-quarter net income tumbled to $152 million, or 33 cents per share, from $471 million, or $1 per share, a year earlier. During the latest quarter, Yum had higher taxes and booked a charge related to its Little Sheep restaurants in China.

Excluding items, Yum earned 85 cents a share for the third quarter - missing analysts' call for a profit of 93 cents per share, according to Thomson Reuters I/B/E/S.

Based on the disappointing sales results from China, and a higher than expected full-year tax rate, Yum now expects an earnings per share decline for 2013 in the high-single to low-double-digit percentage range. It previously had expected a mid-single-digit percentage decline in full-year earnings per share. Both estimates exclude special items.

Shares in Yum fell $5.37 to $66.30 in extended trading.