Yum Brands Q3 profit boosted by strong China sales

LOUISVILLE, Ky. (AP) — Yum Brands Inc., owner of the Pizza Hut, Taco Bell and KFC chains, reported Tuesday that its third-quarter profit grew thanks to strong sales in China and elsewhere overseas that offset another sluggish showing in the U.S.

Yum said it added 138 restaurants in China during the quarter, and is on track to open a record 600 new units there this year. Operating profit in China was up in the single digits, adjusted for currency fluctuations, as the company faced rising commodity and labor costs.

In Yum’s international division, operating profit rose 3 percent, adjusted for currency fluctuations. And its franchise fees are on pace for a record year of more than $850 million in the division, which excludes China.

But in the U.S., operating profit fell 16 percent and sales dropped at its three main brands.

“We’re obviously disappointed in our U.S. performance,” Yum Chairman and CEO David C. Novak said in a statement.

Yum, based in Louisville, earned $383 million, or 80 cents per share, for the quarter ending Sept. 3. That’s up from $357 million, or 74 cents per share, a year earlier.

The company reported losses of 3 cents per share, stemming from decisions to refranchise its Pizza Hut business in the United Kingdom and its planned sale of the Long John Silver’s and A&W All American Restaurants chains. The company, which put the brands up for sale earlier this year to focus on its international business, said last month that it has found buyers for them but didn’t disclose financial terms.

Excluding those special items, Yum posted a profit of 83 cents a share, which is one cent per share above what analysts were expecting. Total revenue rose 14 percent to nearly $3.3 billion, well above the $3.08 billion in revenue analysts surveyed by FactSet were expecting.

But revenue at KFC and Pizza Hut restaurants in the U.S. open at least a year fell 3 percent each, while Taco Bell had a 2 percent drop.

Taco Bell, which accounts for about 60 percent of U.S. profit for Yum, has been struggling to regain momentum after publicity from a now-dropped lawsuit questioned the beef content of filling in the chain’s tacos and burritos. Taco Bell called the accusations false and fought back with marketing on television and in newspapers.

“It looks like it’s stabilizing and we’ll get to the point next year where they’ll be bouncing up against some easier comparisons so that will help,” Edward Jones analyst Jack Russo said of Taco Bell. “They’ve got a job to do PR-wise to repair that.”

The company is having better luck overseas.

In its international division, which excludes China, Yum opened 193 new restaurants in 50 countries during the quarter and expects to open 900 new units for the year.

In its key China business, operating profit rose 7 percent, adjusted for currency fluctuations.

Novak said the robust restaurant growth overseas puts Yum in position for strong growth in 2012 and the performance in China, in particular, “gives us even more confidence our China business model is as strong as ever.”

He said Yum plans to roll out new products along with productivity initiatives that he predicted will improve U.S. sales and profits next year. The company reaffirmed its full-year earnings-per-share growth of at least 12 percent.

Yum operates nearly 38,000 restaurants in more than 110 countries and territories. Company officials will discuss the quarter’s results on a conference call Thursday morning.

Yum reported earnings after the market closed. Its shares slipped 85 cents, or 1.7 percent, to $48.59 in extended trading. They had closed the regular session up 99 cents, or 2 percent, at $49.44.

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