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Since December 2012, sales in the company’s once high-flying China division have cratered as a result of negative publicity surrounding poultry suppliers in China, including a few small former suppliers of KFC who were implicated in a state television report exposing the use of antibiotics in Chinese poultry farming.

Yum responded with a major quality assurance campaign in China, and while same-store sales have mostly improved from decreases of 41 percent at KFC and 15 percent at Pizza Hut in January, the recovery has not been linear. The division’s same-store sales slipped sequentially from down 13 percent in March to down 29 percent in April, as new fears of an avian-flu outbreak in China temporarily derailed KFC’s progress toward recovery.

July’s sales were another slight hiccup, decreasing 13 percent after June’s same-store sales decline had narrowed to down just 10 percent compared with the prior year. While August’s performance was a sequential improvement, analysts noted that Wall Street expected a decline of about 8 percent, obscuring just how likely it is that Yum could effect a quarterly increase in same-store sales by the fourth quarter of this year.

In a research note, Jefferies Equity Research analyst Andy Barish pointed out that, in addition to the staying power of bad publicity over the poultry supply, Yum must also combat increased competition and “more volatile Chinese consumer spending trends.”

“While we do believe concerns related to last year’s bad publicity are diminishing,” Barish wrote, “we do not get the sense that the company has much control over the trajectory of the recovery…. Consumers are more cautious about their future earnings power and therefore more discerning with their dollars, while local and overseas restaurant chains continue to expand rapidly through the country.”

Yum plans to host investors and securities analysts for meetings in Shanghai Sept. 9 and 10.

In addition to KFC and Pizza Hut, Yum also operates and franchises Taco Bell in the United States and around the world. The company has more than 39,000 restaurants in more than 120 countries.

Contact Mark Brandau at mark.brandau@penton.com.
Follow him on Twitter: @Mark_from_NRN