Yum! Brands earnings falter on China performance

by Erica Shaffer
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Yum! Brands' China business continues to battle competitors and negative publicity.

LOUISVILLE, Ky. – Yum! Brands Inc.’s troubles in China won't go away.

Even as the company’s KFC and Taco Bell divisions posted strong sales, a lackluster performance in China continued to weigh on results. The company’s China Division system sales declined 6 percent for the first quarter ended March 21. Restaurant margin slipped 4.5 points to 18.9 percent, while operating profit plunged 31 percent. Same-store sales decline of 12 percent offset 8 percent unit growth. Same-store sales declines include 14 percent at KFC and 6 percent at Pizza Hut, according to the company.

Negative perceptions of the company’s food quality continue to weigh on results even after Yum! cut ties with a supplier over alleged food safety lapses. The company also faces rising competition in China from other dining chains.

Still, the company opened 171 new units during the quarter and plans to move ahead with plans to open more restaurants in 2015. Greg Creed, CEO, said he was pleased by continuing progress made in China, which accounts for half of the company’s revenue. Creed noted improvements in sales and consumer perception in China.

“China Division restaurant margins were a healthy 19 percent even though same-store sales declined 12 percent, reinforcing our belief in significant operating leverage as sales recover,” Creed said in a statement. “We remain on track to open at least 700 new restaurants in China this year with strong returns, laying the groundwork for future growth.”

Net income for the quarter fell 9 percent to $362 million from $399 million in the year-ago quarter. Total revenues were $2.6 billion, down 4 percent from $2.7 billion a year ago.

“While EPS declined in the first quarter, I’m pleased with the strong performance from our KFC and Taco Bell Divisions, as well as the continued progress we are making in China,” Creed said. “I’m confident we will deliver full-year EPS growth of at least 10 percent, with a strong second half in China and solid brand-building initiatives underway at each of our divisions.”

On a division basis, KFC system sales increased 8 percent, driven by 2 percent unit growth and 5 percent same-store sales growth.

System sales increased 9 percent in the company’s Taco Bell Division. The company attributed sales growth in the division to 3 percent unit growth and 6 percent same-store sales growth. Creed credited innovation and a solid breakfast platform for the positive results.

Pizza Hut Division system sales increased 2 percent on 2 percent unit growth while same-store sales were flat. Operating margin and profit declined 1.5 percent and 2 percent, respectively.

Yum! reported unit growth of 18 percent in the company’s India Division was largely offset by an 11 percent same-store sales decline. System sales climbed 1 percent.

“Our central goal remains building three iconic, global brands people trust and champion,” Creed said. “We remain focused on the three keys to driving shareholder value: same-store sales growth, new-unit development and generating high returns on invested capital. I believe this combination of efforts will enable us to reestablish our track record of consistently delivering double-digit EPS growth in 2015 and the years ahead.”

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