pizza hut
Reuters

Fast-food conglomerate Yum! Brands, Inc. (NYSE: YUM), the parent company of KFC, Pizza Hut and Taco Bell, will report a 5.6 percent fourth-quarter profit decline as higher costs in its Chinese KFC operations offset increased revenue.

Headquartered in Louisville, Ky., Yum will report its fourth-quarter and annual earnings on Monday after markets close. According to analysts polled by Thomson Reuters, Yum will report net income of $366.59 million, or $1.27 per share, compared with $387 million, or 72 cents per share, in the year-earlier period. Revenue is expected to be $4.27 billion compared with $4.15 billion in the fourth quarter of 2012. Excluding one-time items, the Street expects earnings per share of 80 cents compared with 83 cents in the fourth quarter of 2012.

Yum’s KFC franchises in China have been plagued with several food safety and health scares, beginning in December 2012 but particularly when a new bird flu strain, H10N8, was discovered in China in December 2013. Unsurprisingly, customers began staying away. On top of that there was an investigation into one of the company’s former local food suppliers, as high levels of antibiotics were found in chicken.

As a result, YUM's costs for chicken and other and other items rose during the fourth quarter of last year and the company had to slash prices to lure wary customers back. The upshot of those two moves was YUM's fourth-quarter gross margin dropping to 20.4 percent from 26.2 percent in the fourth quarter of 2012.

A slightly more sanguine view of YUM's fourth-quarter performance in China comes from Jeffrey A. Bernstein of Barclays Research. He said that the second half of last December benefited from a favorable comparison to the year-earlier period when the chicken supplier issue first arose. That, "along with renewed focus on restaurant level cost control," leads him to forecast an adjusted earnings per share of 82 cents.

Yum saw consistent monthly declines in same-store sales throughout 2013, and that slide continued early in the fourth-quarter. However, November and December saw a slight improvement resulting from what turned out to be some provocative promotional activity. A half-price promotion that continued through mid-November, which was controversial in itself, boosted sales late in the fourth-quarter but not enough to offset other setbacks, resulting in a 4 percent decline in overall fourth-quarter same-store sales. Same-store sales are sales at stores that have been open at least one year.

On the other hand, Pizza Hut’s growing presence in China also continues to be a lifeline for Yum, with same-store sales in the world's second-biggest economy jumping 7 percent in November. Though Pizza Hut saw a 3 percent dip in same-store sales in December, the subsidiary brand finished the fourth-quarter with a growth of 5 percent. With about 1,000 Pizza Hut locations, the fast-food pizza joint has been performing well in China as it expands its lucrative delivery business in China.

Outside of China, the U.S. continues to be a relatively flat market for Yum. Coming off of impressive third-quarter sales, Yum’s Mexican-food brand, Taco Bell, continued some of it's momentum in the U.S. market with new menu items like the Doritos Locos Taco. Barclays' Bernstein expects Pizza Hut in the U.S. to report a 4 percent revenue increase, Taco Bell to report a 3 percent revenue climb and KFC to report a 2 percent revenue decline.

In November, the company announced the authorization of up to $750 million in share repurchases. Yum Brands’ decision to fire up a new share buyback plan in the fourth quarter will likely be reflected in the expected dramatic increase in earnings per share to $1.27 compared with 72 cents. Bernstein forecasts the share buyback will boost EPS by about 2 cents.

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