Yum Earnings Slide as China Sales Take a Hit

Aaron M. Sprecher | Bloomberg | Getty Images

The KFC logo is displayed outside on a KFC restaurant, a unit of Yum! Brands Inc., in Houston, Texas.

Yum Brands, parent company of KFC, reported a 16-percent decline in quarterly earnings on Wednesday as sales in China fell sharply.

"KFC sales and profits in China were significantly impacted by intense media surrounding avian flu, as well as the residual effect of the December poultry supply incident. The good news is that China sales are recovering as expected," Yum's Chairman and CEO David C. Novak said in a statement.

Second-quarter net income fell to $281 million, or 61 cents a share, from $331 million, or 69 cents a share, in the year-earlier period.

Excluding items, earnings dropped to 56 cents a share from 67 cents a share last year.

Revenue decreased 8.5 percent to $2.9 billion from $3.17 billion a year ago.

Analysts had expected the company to report earnings excluding items of 54 cents a share on $2.93 billion in revenue, according to a consensus estimate from Thomson Reuters.

Same-store sales were down 20 percent in China, up 1 percent in the U.S.

"For the total China Division, we remain on track to open at least 700 new units this year," Novak said. "We expect record new-unit openings for Yum Restaurants International and in India this year. Our emerging market new-unit pipeline is stronger than ever."

Yum has dealt with food safety scares and disease outbreaks in China before and analysts are cautiously optimistic that its business in the world's fastest-growing major economy will recover as quickly as it has in the past.

The latest blow came at the end of 2012, when the discovery of excessive levels of antibiotics in chicken from two of Yum's suppliers prompted government food safety agencies to probe the company's supply chain. Yum was not fined by food safety authorities, but it suffered a widespread backlash in the mainstream media and on Weibo, the China equivalent to popular U.S. social media site Twitter.

In April, just as those issues began to wane, reports about a new bird flu outbreak in the country picked up steam.

While the official end to the fast-food chain's overall quarter was June 15, Yum's China quarter ended on May 31.

Yum reiterated its prior forecast for a mid-single-digit, full-year decline in earnings per share. The company, whose other fast-food chains include Taco Bell and Pizza Hut, expects China restaurant sales to be positive in the fourth quarter.

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—By CNBC with Reuters