Yum! Brands Q3 profit up 48%, revenues missed

by Erica Shaffer
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KFC and Taco Bell delivered improved earnings, while Pizza Hut remained flat.
 

LOUISVILLE, Ky. – Net income for Yum! Brands Inc. jumped 48 percent in the third quarter ended Sept. 3, while revenues slipped 3 percent. The company’s third-quarter earnings release is the final report before the spinoff of Yum’s China business at the end of October.

Net income for the third quarter was $622 million, or $1.56 per diluted share, compared with $421 million, or $0.95 per diluted share reported in the third quarter last year.

Total revenues  the quarter eased 3 percent to $3,316 million from $3,427 reported in the year-ago period.

On a segment basis, KFC Division reported total revenues of $723 million compared with $721 million reported in the third quarter of 2016. Operating profit in the segment climbed 11 percent to $160 million. Same-store sales grew 4 percent. System sales increased 7 percent, excluding foreign currency translation. KFC opened 138 new international restaurants in 42 countries, including 96 units in emerging markets.

Total revenues in the Pizza Hut Division declined 13 percent to $230 million in the third quarter. Operating profit declined 6 percent to $61 million from $65 million. Same-store sales slipped 1 percent, while system sales were flat, excluding foreign currency translation. The Pizza Hut Division opened 105 new international restaurants in 40 countries, including 71 units in emerging markets.

Taco Bell reported total revenues of $481 million, a 2 percent increase from the third quarter of 2016. Operating profit in the segment climbed 9 percent to $143 million from $132 million. Excluding foreign currency translation, system sales increased 5 percent, while same-store sales grew 3 percent. Restaurant margin declined .4 percentage points to 21.7 percent on higher labor costs. The result was partially offset by same-store sales growth and lower commodity costs. The Taco Bell Division opened 63 new restaurants.

“In the third quarter, I was pleased with both KFC’s and Taco Bell’s performance, each of which returned to a focus on core menu items, but in ways that were distinctive, disruptive and relevant,” Yum CEO Greg Creed said in a statement. “Both brands had accelerating same-store sales growth, despite sluggish QSR industry trends, especially in the US.

“We are excited about the momentum we are seeing in our base business as we embark on the next chapter of growth at our company,” Creed added.

That next phase includes the separation of Yum Brands and its China business, which has been renamed Yum China Holdings, Inc. and is expected to begin trading on the New York Stock Exchange on Nov. 1 under the symbol “YUMC.” After the spinoff, the company explained, the China Division’s historical results and related tax expense will be reclassified to Discontinued Operations within the company’s income statement.

For the third quarter, system sales in the China Division increased 3 percent, excluding foreign currency translation. Same-store sales decreased 1 percent, with declines of 1 percent at KFC and 4 percent at Pizza Hut Casual Dining. Total revenues for the China Division declined 4 percent to $1,883 million from $1,969 million. Operating profit in the division rose 7 percent to $348 million from $327 million due to recent value-added tax reform in China, the company said. The China Division opened 133 new units during the quarter.

“Sales were off to a good start in the first six weeks of the quarter in the China Division. However, anticipated tougher laps in the second half of the third quarter were compounded by an international court ruling on claims regarding the South China Sea, which triggered a series of regional protests and negative sentiment against a few international companies with well-known Western brands,” Creed said. “If not for this event, we believe the China Division would have delivered its fifth consecutive quarter of positive same-store sales growth. The good news is the incident was short-lived and the sales impact continued to dissipate through August and September. Despite the protests, Pizza Hut Casual Dining continued its trend of quarterly sequential improvement.”

Creed noted that the formal separation of the China business marks “the beginning of a massive transformation for Yum! Brands.”

“The new Yum! Brands will become a unique and focused world-class franchisor with consistent, stable cash flow generation and an efficient cost structure that encourages growth,” he said.

Yum plans to share the details of the company’s strategic plans at its New York investor conference on Oct. 11.

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