Yum! Brands Says China Food Scandal Hurting KFC, Pizza Hut Sales

Yum! Brands Inc. (NYSE:YUM), owner of the KFC and Pizza Hut chains, said Wednesday that a food-safety scandal in China, which involved the sale of spoiled meat by one of its suppliers, has significantly hurt sales over the past 10 days and raised concerns about the company's profitability for the year.

In a filing with the U.S. Securities and Exchange Commission, Yum Brands did not disclose financial details, saying that it was too early to predict when sales might bounce back. However, the Louisville, Kentucky-based company said that if the fallout from the reports about the tainted meat, which "has shaken consumer confidence" and "impacted brand usage" is prolonged, it might hurt the company’s profits for 2014.

The scandal has had "a significant, negative impact to same-store sales at both KFC and Pizza Hut in China over the past 10 days," the company said in the SEC filing Wednesday, adding that "it is too early to know how quickly sales will rebound in China and the corresponding full-year financial impact to Yum! Brands. However, if the significant sales impact is sustained, it will have a material effect on full-year earnings per share."

Shares of Yum! Brands, which is considered to be China’s biggest restaurant operator with more than 4,600 KFC outlets and 1,200 Pizza Huts, dropped 6.15 percent in after-hours trading.

The latest food scandal in China has hit even as Yum Brands has been working to restore credibility and sales after being hit by a food-safety scare in the country about 18 months ago.

In December 2012, Shanghai authorities said that tests conducted from 2010 to 2011 by a third-party agency found high levels of antibiotics in eight batches of chicken supplied to Yum by Liuhe Group, which also supplied meat to McDonald's Corporation (NYSE:MCD) in China at the time.

The latest controversy erupted last week when a Shanghai TV station reported that Shanghai Husi Food, a Chinese branch of Illinois-based OSI Group LLC, was selling expired beef and chicken.

Following the report, McDonald’s and Yum! Brands suspended orders from the supplier. Yum also said that it would no longer do business with OSI in China, the U.S., and Australia. Last week, local authorities arrested five people, including the head of Shanghai Husi Food and its quality manager, as part of an investigation into the food scandal.

OSI Group LLC issued a statement earlier this week saying that it had recalled all products made by its Shanghai unit and will cooperate with the ongoing investigation.