Reuters
Yum Brands profit tops forecasts, outlook raised
Thursday October 12, 2:04 am ET
By Nichola Groom and Jerker Hellstrom
LOS ANGELES/SHANGHAI (Reuters) - Fast-food company Yum Brands Inc. (NYSE:YUM - News) on Wednesday posted a 12 percent rise in quarterly earnings and raised its outlook for the year as strong performances in China and other international markets offset weaker sales in the United States.
Shares of the company rose 2.6 percent in extended trading following the announcement.
Yum's China division, which includes Thailand and KFC Taiwan in addition to mainland China, now makes up nearly a third of the company's operating profit. Yum's KFC chain handily tops McDonald's Corp. (NYSE:MCD - News) as the largest fast-food chain in China, and the company said it is opening one restaurant a day in that market.
Net income for the third quarter ended September 9 rose to $230 million, or 83 cents per share, from $205 million, or 69 cents per share, a year ago.
The results comfortably beat Wall Street forecasts as analysts, on average, expected a profit of 75 cents per share, according to Reuters Estimates.
Yum, based in Louisville, Kentucky, operates more than 34,000 fast-food restaurants in more than 100 countries, including the KFC, Pizza Hut and Taco Bell chains.
Quarterly sales at Yum's U.S. restaurants open at least a year fell 2 percent, due in part to tough comparisons at Taco Bell against strong year-ago results and stiff competition from Pizza Hut rivals Dominos Pizza Inc. (NYSE
PZ - News) and Papa John's International Inc. (NASDAQ
ZZA - News)
In the latest four-week period ended October 7, U.S. same-store sales fell 1 percent, Yum said, led by a 2 percent decline at KFC. Taco Bell's same-store sales fell 1 percent, while same-store sales were flat at Pizza Hut.
Total sales rose 9 percent in local currency at Yum Restaurants International in the period ended September 11, and climbed 19 percent in local currency at Yum's China division for the period ended September 30.
INTERNATIONAL STRONG
In a statement, Yum Chief Executive David Novak said the strength of the company's international businesses would enable it to keep increasing earnings per share by at least 10 percent a year while at the same time generating "substantial cash."
Profit at Yum's fast-growing China business rose 26 percent during the quarter. Yum has nearly 1,700 KFC restaurants and 261 Pizza Huts in mainland China. McDonald's has less than 1,000 restaurants in China.
Earnings rose 22 percent at its international business, which excludes China.
Yum's China division is expected to post a 35 percent to 40 percent increase in operating profit this year, while its international business is expected to record an increase in operating profit of at least 10 percent, Blum said.
Yum estimates that roughly three out of four Chinese ate at KFC at least once in 2004, and that the number should have grown further this year.
KFC opened its first mainland China restaurant in Beijing in 1987, and says that it is the largest and fastest-growing fast food chain in the country.
"They came early to China, they have been successful in finding good locations, and their menu suits Chinese tastes," said Candy Huang, analyst with BNP Paribas in Shanghai. "Chinese like to eat chicken."
Yum had seen some pressure on China sales from the avian flu scare as consumers became wary of chicken products after the re-emergence of the H5N1 virus in Asia in 2003, said Mu Hainan, senior consultant with SunLand Consulting.
But he said Sam Su, the Taiwan-born President of Yum Brands' China division who joined KFC in May 1989, had been able to steer the firm back to strong sales growth.
Restaurant profit margins increased across all of Yum's businesses, in part because of lower food and labor costs.
In Wednesday's statement, Yum said it was on track to sell about 1,000 company-owned restaurants to franchisees this year and next. However, the company forecast 2006 cash proceeds from the sales would be at least $250 million, up from an original target of $150 million.
Refranchising restaurants reduces company sales, but improves profit margins because the company collects more in franchise fees without paying to operate the restaurants.
For the full year, Yum raised its earnings outlook to $2.89 per share from a previous view of a profit of at least $2.83 per share. Analysts were expecting earnings of about $2.84 per share, according to Reuters Estimates.
Yum shares rose to $56 after hours after closing at $54.57 Wednesday on the New York Stock Exchange. As of the close, the stock has gained 13 percent year-to-date, compared with a nearly 15 percent gain in the Standard & Poor's restaurants index (^15GSPREST - News).
Yum has a goal of returning $1 billion to shareholders this year through share buybacks in and dividends. The company said it would reduce its share count by 6 percent this year.
