Rats @ CNBC

Market Dispatches2/23/2007 5:30 PM ET

Taco Bell and KFC: Not so YUM-my?

A video of rats in a New York restaurant sparks another public relations disaster for Yum Brands, parent of the fast-food restaurant chains.

By Elizabeth Strott

It looks like Yum Brands (YUM, news, msgs) has a bit of a rat problem.

Shares of the company, which owns the Taco Bell and KFC fast-food chains as well as Pizza Hut, took a hit Friday morning after video began circulating showing rats scurrying around a KFC/Taco Bell restaurant in New York's Greenwich Village neighborhood.

The stock dropped down more than 1.5% to $60.12 in early trading after a customer called a local television station and tipped off the news desk to the rat problem. At the close of trading, the stock had recovered somewhat but was still off 0.9% at $60.51. It's down 4.7% from an all-time high of $63.47 reached in late November.

The incident was only the latest public-relations debacle for Yum Brands, whose Taco Bell restaurants were hit this winter by an outbreak of E. coli, which sickened 71 people in five states. (In that case, the culprit wasn't a rat, but lettuce.)

Cost of E. coli woes: $20 million

Yum's chief financial officer, Rick Carucci, said earlier this month that the E. coli problems cost the company $20 million in operating profit.

"About half of that was from lost sales," Carucci said in a conference call Feb. 13. The rest was due to marketing, consumer research, legal and other expenses.

Yum reported earnings for the fourth quarter of 83 cents per share, an increase from the 77 cents it earned a year earlier and ahead of analysts' estimate of 79 cents per share. The company said strong sales overseas helped offset the drop in sales from the E. coli fiasco.

But U.S. revenue fell 10% in the quarter, and same-store sales at Taco Bell restaurants suffered, falling 5% from the same quarter the year before. Taco Bell had been the company's most profitable brand.

New York City's health department recently gave the Greenwich Village Taco Bell a clean bill of health after issuing a violation for evidence of rats as recently as Dec. 11. The restaurant was also cited in 2004 and 2005.

Yum Brands has issued a statement in response, saying "nothing is more important to us than the health and safety of our customers."

Stock Charts (Year)

YUM Brands
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The health department has closed the restaurant, pending a new inspection.

Facing the PR blues

Yum Brands isn't the only consumer brand that has been facing major PR challenges.

Last week, ConAgra Foods (CAG, news, msgs) recalled Peter Pan and Great Value peanut butter made at its Sylvester, Ga., plant after health officials linked the products to an outbreak of salmonella. The outbreak has sickened more than 300 people across the country since August.

The company said it expects to record a third-quarter charge of between $50 million and $60 million, or 6 to 8 cents a share, related to the recall.

Stock Charts (Year)

JetBlue Airways
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Discount airline JetBlue Airways (JBLU, news, msgs) has been hammered by bad press after a storm in the U.S. Northeast left some passengers stranded on JetBlue airplanes for as many as 10 hours at New York's JFK airport.

CEO David Neeleman reacted almost immediately with an apology, refunds and vouchers to help repair its credibility, and the airline issued a "passenger bill of rights" earlier this week to appease disgruntled passengers. Neeleman also went on "Late Show with David Letterman," something one observer called "a brilliant move."

"They did something really smart," said David W. Guth, an associate dean of the University of Kansas' William Allen White School of Journalism and Mass Communications. "When you put a human face on a problem, and you show that you're sincere, that goes a long way."

$30 million in refunds and other costs

JetBlue has already said it expects the PR nightmare to affect the company's first-quarter results, costing the airline up to $30 million in refunds, credits and overtime expenses.

The airline now expects first-quarter pretax margins between negative 8% and 10%, below its previous forecast of negative 2% to 4%.

The headaches for Yum Brands, JetBlue and ConAgra are nothing new to big business. "Even the best-run companies have things happen to them," Guth noted.

Guth said the biggest mistake a company can make is not to say anything. "If there clearly a problem, you have to acknowledge it," he said, adding that, because this is Yum Brands' second recent incident, the window of opportunity to fix things is shorter.

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