Owner of KFC, Pizza Hut blames South China Sea dispute for hammering results in Asia

A car sits parked outside of a Yum! Brands Inc. KFC restaurant.
A car sits parked outside of a Yum! Brands Inc. KFC restaurant.PHOTO: BLOOMBERG

CHICAGO (Bloomberg, Reuters) - Yum! Brands Inc., the fast-food giant that owns KFC, Pizza Hut and Taco Bell, had an unusual reason for its results falling short of expectations last quarter: the dispute over the South China Sea.

In July, an international tribunal in The Hague ruled in favour of the Philippines in a landmark case, finding that China had violated international law in the South China Sea.

Yum, the biggest Western restaurant operator in China, said that ruling triggered regional protests against a few multinational companies with well-known Western brands.

That took a toll on Yum's sales, Chief Executive Officer Greg Creed said on Wednesday (Oct 5).

Analysts had projected a same-store sales gain of 4.1 per cent in China during the third quarter, according to Consensus Metrix. Instead, they fell 1 per cent, marring the final full quarter that the Chinese business will be part of the company.

Yum plans to complete a spinoff of the operations on Oct 31.

"Sales were off to a good start in the first six weeks of the quarter," Creed said in a statement announcing the results.

However, the court ruling "triggered a series of regional protests and negative sentiment against a few international companies with well-known Western brands. If not for this event, we believe the China division would have delivered its fifth consecutive quarter of positive same-store sales growth."

Profit was US$1.09 a share in the quarter, excluding some items, the Louisville, Kentucky-based company said. Analysts had projected US$1.10 on average, according to data compiled by Bloomberg. Revenue was US$3.32 billion in the period, which ended Sept 3, missing the US$3.49 billion estimated by analysts.

The shares fell as much as 5.4 per cent to US$83.80 in late trading. Through Wednesday's close, Yum climbed 21 per cent this year, while the Standard & Poor's 500 Index gained 5.7 per cent.

The good news, Creed said, is Chinese consumers appear to have moved on from the protests.

"The incident was short-lived and the sales impact continued to dissipate through August and September," Creed said.

As part of its spinoff plan, Yum will give one share of Yum China Holdings Inc. for each share of Yum Brands held. The new company will begin trading Nov 1 on the New York Stock Exchange under the YUMC ticker.

Last month, Yum agreed to sell a combined US$460 million stake in its Chinese operations to Primavera Capital Group and Ant Financial Services Group. Fred Hu, founder of Primavera and also the former Goldman Sachs Group Inc. chairman in charge of Greater China, will be chairman of Yum China.

Yum is performing better in other countries, said Jack Russo, an analyst at Edward Jones & Co.

"The other brands outside of China did well," he said.