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Originally published Tuesday, April 23, 2013 at 3:00 PM

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Yum beats expectations, warns of bird flu impact

A new strain of bird flu in China is sabotaging Yum's efforts to rebuild trust with KFC customers following an earlier controversy over its chicken supply.

AP Food Industry Writer

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NEW YORK —

A new strain of bird flu in China is sabotaging Yum's efforts to rebuild trust with KFC customers following an earlier controversy over its chicken supply.

Yum Brands Inc., which owns KFC, Pizza Hut and Taco Bell, on Tuesday reported a steep decline in its net income as sales in China took a big hit. But the results weren't as bad as analysts feared and its shares gained in aftermarket trading.

The fast-food company, which has 36,000 locations globally, has been reeling from a Chinese TV report in late December that said some KFC suppliers were giving chickens unapproved levels of antibiotics. In the first quarter, Yum saw a 20 percent decline in sales at stores open at least a year in China.

"As anticipated, intense media attention surrounding poultry supply in China significantly impacted KFC sales and profit," CEO David Novak said in a statement.

The company has been trying to restore confidence with customers using TV ads and in-store signs that underscore the quality of KFC's chicken in a push called "Operation Thunder." The name is a reference to the "swift and decisive" action the company is taking, said Jonathan Blum, a Yum spokesman.

That push was just starting to yield some improvement in Yum's China sales when a new strain of bird flu was reported at the end of March, sparking fresh fears about chicken. For April, the company said sales in the country are down about 30 percent so far.

The chicken issues - and the subsequent sales decline - are troubling for Yum because it previously got about 40 percent of its operating profit from China. Yum is among the many companies that have rushed to the country as a way to ensure future growth, given the country's rapidly expanding middle-class population hungry for more convenient foods.

Already, Yum is the biggest Western fast-food chain in China with about 5,300 locations, most of them KFC restaurants. That's more than triple the number of McDonald's restaurants.

Despite the recent troubles, Yum executives say they're forging ahead with plans to open another 700 restaurants in the country this year. They note that Yum has overcome troubles in the past, such as a bird flu scare in 2005 that dragged down sales by as much as 40 percent.

Novak said Tuesday that he's confident that the company will return to double-digit earnings per share growth "in 2014 and beyond."

Meanwhile, the U.S. was a bright spot for the quarter. Sales at restaurants open at least a year rose 6 percent at Taco Bell, helped by the introduction of its Doritos Locos Tacos in Cool Ranch flavor. KFC and Pizza Hut also saw sales at established restaurants rise by 1 percent.

Yum stood by its full-year forecast for earnings per share to decline in the mid-single digits as a result of its issues in China. That would snap a streak of 11 years of double-digit growth.

For the quarter, Yum said it earned $337 million, or 72 cents per share. That's down from the $458 million, or 96 cents per share, a year ago.

Excluding one-time items, the company, which is based in Louisville, Ky., said it earned 70 cents per share, above the 60 cents per share analysts expected.

Revenue fell 8 percent to $2.54 billion, below the $2.56 billion Wall Street expected.

Shares of Yum were up 6 percent at $67.75.

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