Yum Executives Take Blame for China Woes, Shares Fall

By Julie Jargon 

Yum Brands Inc. executives took full responsibility for missteps in China that led to disappointing quarterly results and erased as much as $7 billion in the company's market value Wednesday.

In a candid accounting, Yum executives said on a conference call Wednesday that they had made mistakes at the company's Pizza Hut chain during the latest quarter, including offering high-price steaks at a time when Chinese consumers were looking for value.

"We all, and I personally, take full accountability for the results in China," Yum Chief Executive Greg Creed said. He pledged "immediate action" to fix operations in the Asian country, the company's largest market.

Mr. Creed said he would not blame the weak performance on China's recent currency devaluation and financial-market volatility. "The simple facts are the economy there is still growing, and there are no reasons why China isn't growing," he said, referring to Yum's China business.

Yum shares recently tumbled 19% to $67.62 in midmorning trading. Earlier Wednesday, the stock hit an intraday low of $67.20.

Yum, which also owns KFC, said it now projects profit to improve by a percentage in the low single digits, down from its previous view of at least 10% growth, largely because of underperformance in China. Same-store sales in China for the quarter ended Sept. 5 rose just 2%, well short of the 9.6% analysts expected.

The company's Pizza Hut chain was largely behind the weakness, Mr. Creed said, explaining that the chain needs to provide "five-star service at three-star pricing." Pizza Hut is planning to offer lower-priced dinner options to attract customers during the week, when business has been soft.

Yum Chief Financial Officer Pat Grismer said same-store sales at its Pizza Hut chain in China declined by 3% in September, "a major miss and something we didn't see coming in August." He said he expects same-store sales at Pizza Hut in China to remain negative until the end of the year.

The company's KFC business in China has fared better, but Mr. Creed said the brand is rolling out simplified menu boards to speed up service and taking popular chicken products from KFC outlets around the world and adapting them to Chinese tastes.

Yum's China business has been struggling for the past three years because of a series of food-safety controversies. The challenges have led analysts and investors to push the company to consider other options for the division, including spinning off the China business.

Analysts on the call pressed the company to explain how it can continue operating the China business amid so much volatility, and how and when investors can expect the business to recover.

Mr. Grismer said there is evidence the business already is recovering, in the form of higher transactions and improved consumer perception of the brands. "We remain confident in the long term that we will recover those transactions," he said.

Mr. Creed declined to comment on any strategic options, saying "my absolute focus is on getting these five [business] divisions firing" on target. He said the company would comment on long-term strategies at an investor conference in December.

Mr. Creed added that with new leadership in China, there are fresh eyes on the business. Sam Su, the executive who built KFC into the largest foreign-restaurant chain in China, in August retired as head of Yum's China division, and Yum veteran Micky Pant took the helm.

"I'm still bullish on China," Mr. Creed said.

Write to Julie Jargon at [e-mail]

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(END) Dow Jones Newswires

October 07, 2015 11:39 ET (15:39 GMT)

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