Yum Brands suffers on China woes Yum Brands, operator of the KFC and Taco Bell chains, reported a 15 per cent drop in second-quarter earnings as food safety fears at its Chinese unit took their toll. However, the company said the unit was recovering and remained on track to open more than 700 new units this year. The Kentucky-based company reported net income of $281m, or 56 cents a share excluding special items, for the three months to June 15, down from $331m, or 67 cents a diluted share, during the same period last year. Revenues for the quarter fell 8 per cent, from $3.17bn last year to $2.9bn. The results beat analyst expectations of earnings of 54 cents per share, but fell below expectations of $2.93bn in sales. They improved on the first quarter, which saw a 26 per cent drop in earnings from last year. In China, which accounted for about 17 per cent of total operating profits and nearly half of revenues in the second quarter, same-store sales fell 20 per cent compared with the same period last year. Operating profits there fell 63 per cent to $68m, from $182m. Yum is China's leading western restaurant company by sales and number of outlets, with nearly 6,000. Most are KFC and many are company-operated rather than franchised. David Novak, chief executive, said intense media attention surrounding an avian flu outbreak earlier this year, and allegations in December that some Yum suppliers in China had injected chicken with growth hormones and antiviral drugs beyond food safety limits, was subsiding, and same-store sales were bouncing back. The company went on the offensive to try to limit damage from the scandal, vowing to strengthen supplier oversight and cutting ties with more than 1,000 small producers used by its 25 poultry suppliers. "The good news is that China sales are recovering as expected," said Mr Novak. For the total China division, we remain on track to open at least 700 new units this year. The company estimates that China same-store sales in June fell 10 per cent from last year, compared with a 19 per cent drop in May. Yum expects same-store sales in the country to be positive by the fourth quarter. Analysts agreed that the company would soon be putting its China troubles behind it. "We assume a solid rebound from food safety-related issues as these types of issues have a track record of being short lived," said Mitchell Speiser, of the Buckingham Research Group, in a pre-earnings note to investors. The company reiterated its expectations that earnings per share would suffer a mid-single-digit drop in 2013. Mr Novak said he expected a "big bounceback year in 2014." Shares in the company were up marginally, to $72.89, in after-market trading in New York.