Revenues, same-store sales climb at Yum!

by Erica Shaffer
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The company is on track to meet refranchising goals by 2018.
 

LOUISVILLE, Ky. – Same-store sales for KFC and Taco Bell climbed 3 percent, and revenues advanced 2 percent during the fourth quarter of 2016, parent company Yum! Brands said in the company’s first earnings report following the spin-off of the Yum China business.

For the quarter ended Dec. 31, 2016, the company reported net income of $267 million, down from $275 million reported in the fourth quarter of 2015. Diluted earnings per share from continuing operations was $0.76 compared with $0.67 a year ago. Excluding special items, EPS was $0.79.

Foreign currency translation negatively impacted operating profit by $11 million.

Revenues for the quarter were $2,024 million, compared with $1,976 million reported in the year-ago period.

Greg Creed, CEO of Yum! Brands, told analysts during an earnings call that “2016 was truly a landmark year. On Oct. 31, we completed the spinoff of the China business. This marked the largest strategic initiative undertaken by Yum! since our spinoff from Pepsi 20 years ago.”

“The spinoff and concurrent return of $6.2 billion to shareholders in 2016 concluded step one in our transformation,” he said.

Creed added that the company is on track to increase its franchise mix to 98 percent by the end of 2018. “By the end of this transformation, we'll own less than 1,000 stores, reduce annual run rate capital expenditures to approximately $100 million, and improve our efficiency by lowering G&A as a percent of system sales to 1.7 percent,” Creed said. “In combination, these efforts will not only enable us to reduce the volatility of our cash flows, but improve absolute cash flow at the same time.”

On a division basis, KFC generated total revenues of $1,042 million in the fourth quarter, compared with $999 million in the fourth quarter of 2015. Operating profit for the quarter was $284 million, up 12 percent from $253 million reported in the year-ago quarter.

Creed said total system sales in emerging markets grew 8 percent for the year, with the strongest growth in Russia and Europe. Total system sales grew 6 percent in international developed markets, with particular strength in Canada, Australia and Europe.

“KFC global strategy to return to the fundamentals across the spectrum is paying off,” Creed explained. “Our strong pride in the core original recipe is at the center of everything we do, and this translates to a focus on the basics in terms of recipe, our well-defined brand positioning, globally based on always original and clear value at memorable price points.

“Innovation closest to the core is resonating with the consumer,” he added. “Just look at Nashville Hot and the recently-launched Georgia Gold. We did not change the form of our product, only the flavor profile and our customers love it.”

KFC also is expanding delivery as the service has quickly become the fastest-growing channel in the business, Creed noted. Currently, KFC offers delivery at more than 5,000 restaurants with plans to expand delivery to more stores, he said.

Pizza Hut revenues declined to $327 million from $368 million reported in the fourth quarter of 2015. Operating profit for the period increased 19 percent to $118 million compared with $100 million reported a year ago.

“Pizza Hut is a strong global brand, but the US and international are two distinct stories,” Creed said. “We’re pleased that our international division is laying the groundwork for prolonged growth, and we’re particularly invigorated by the team’s ability to drive development.”

Yum! expects continued growth in the Pizza Hut division after signing ambitious development agreements for Central and Eastern Europe. The company also signed a separate master franchise agreement in Australia, Creed said, where the new franchise partner acquired another pizza chain that will merge into the Pizza Hut brand over time.

Pizza Hut in the US “is clearly in turnaround mode,” Creed said.

“The quarter's results disappointed and are not acceptable,” he added. “We have undertaken an extensive study of the business utilizing outside experts and found a number of areas where we need to improve in order to take our fair share of growth in this market. These areas include improvements in the digital experience, delivery times, point-of-sale system simplification, and asset optimization, among others.”

Taco Bell reported solid fourth quarter operating profit of $192 million, up 27 percent from $150 million in the fourth quarter of 2015. Revenues for the quarter totaled $655 million compared with $609 million reported a year ago. Creed said the results proved the merits of the brand’s value-driven, innovation-focused model which was able to deliver a strong performance despite difficult industry headwinds.

“In the quarter, Taco Bell saw particular success with the $1 all day messaging and the rolled chicken tacos,” Creed said. “As we look to 2017, we're energized by Taco Bell's high/low value strategy and its innovative marketing calendar, including the $1 double stack tacos and the highly-anticipated Naked Chicken Chalupa, which is off to a great start.”

Internationally, Canada, Spain and the Philippines delivered strong fourth quarter same-store sales. “The brand launched in Brazil with five new stores in only three months and we're thrilled with the consumer enthusiasm for the Taco Bell in China, which recently opened and is off to a great start,” Creed said. “In fact, I'll be visiting this critical market in March and we’re already looking for ways to work together with Yum! China to accelerate the growth of Taco Bell going forward.”

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