Business

Yum profit up as China keeps growing

February 07, 2012

People dine at a Kentucky Fried Chicken (KFC) outlet in Shanghai in this May 2, 2008 file photo. — Reuters pic  People dine at a Kentucky Fried Chicken (KFC) outlet in Shanghai in this May 2, 2008 file photo. — Reuters pic

The shares of the fast-food chain, which are up more than 25 per cent from a year ago and trading around all-time highs, were up 2.3 per cent to US$64.62 (RM 194.37) in extended trading after Yum also reported better-than-expected restaurant sales growth in up-and-coming international markets.

“They demonstrated once again that they’re one of the best consumer plays on emerging markets,” said Tucker Brown, research principal at Sustainable Growth Advisors, which holds Yum in its SGA Global Growth Fund.

China — the world’s fastest growing major economy — is Yum’s biggest earnings driver, accounting for just over 40 per cent of overall profits.

Yum’s unexpectedly strong 21 per cent gain in sales at established restaurants in China took many analysts by surprise. That result overshadowed an expected but still sharp rise in food and labor costs, which took a bite out of margins during the fourth quarter.

“I think the topline growth in China trumped the cost pressures in this case,” Morningstar analyst R.J. Hottovy told Reuters.

Recent price increases also helped the company deliver a 15 per cent operating profit for its China division and should help sustain high-quality growth, Brown said.

During the third quarter, Yum’s China same-restaurant sales rose 19 per cent and operating profit was 7 per cent.

Based in Louisville, Kentucky, the company has almost 4,500 restaurants, mostly KFC outlets, in China. In 1987, it was the first Western fast-food brand to enter China and now has far more restaurants than competitors such as McDonald’s Corp and Starbucks Corp.

Yum’s other brands in China are Pizza Hut, East Dawning and Little Sheep, in which it has a controlling stake.

China’s government is attempting to gently cool the country’s red hot economic growth, a prospect that has investors on edge because the growth helps underpin the global economy.

A Reuters poll in January showed China’s economic growth is likely to moderate to 8.4 per cent from 2011’s 9.2 per cent as demand at home and abroad slackens.

PROFIT BEAT

Yum’s net income in the fourth quarter ended December 31 grew 30 per cent to US$356 million, or 75 cents per share — topping analysts’ average view by 1 cent, according to Thomson Reuters I/B/E/S.

Same-restaurant sales at Yum Restaurants International (YRI) were up 3 per cent during the quarter. That division included Yum’s other non-US markets such as France, India and Russia.

Beginning in the first quarter, India will become a separate business segment at Yum.

While Yum’s business is robust in international markets, it has been working on a turnaround in its US business.

Yum’s overall sales at US restaurants open at least one year were up 1 per cent in the fourth quarter. That included an expectations-topping 6 per cent rise at Pizza Hut and declines of 2 per cent at Taco Bell and 1 per cent at KFC.

The overall growth of 1 per cent “should be seen as a victory for the chronically underperforming US segment of the business,” said Channing Smith, managing director of Capital Advisors, which holds Yum in its Capital Advisors Growth Fund. He recommended that investors use any pullbacks in Yum’s stock price to build a position in the company. — Reuters

 

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