Yum! Brands Inc. reported results for the second quarter ended June 16, including global system sales growth of 8 percent.
Even though the company's profit missed analysts' expectations on slowed China growth, the company anticipates a new-unit forecast of a record 1,700 international stores for 2012, including at least 700 in China.
CEO David Novak said China's operating profit was down 4 percent from last year largely due to a decline in restaurant margins. He expects this to be short lived, however, as menu initiatives take hold and inflation moderates.
"The China economy is slowing and sales will likely soften, especially as we overlap a strong performance from last year," Novak said in an earnings call held this morning. He reiterated the "tremendous" potential that remains in China, citing that Yum! Brands has four restaurants per million people there, versus 60 per million in the U.S.
U.S. division driven by Taco Bell's product innovation
Besides China,the big story for Yum!'s second quarter was the lift by Taco Bell U.S., attributable to the Doritos Locos Taco, the most successful product launch in the company's history.
Yum!'s U.S. Division same-store sales increased 7 percent, including growth of 13 percent at Taco Bell, 4 percent at Pizza Hut and 1 percent at KFC. Restaurant margin increased 5.8 percentage points, driven primarily by strong sales leverage.
"In the U.S., we dramatically improved brand positions and consistency," Novak said. "Our operating profit was up 26 percent with Taco Bell leading the way behind the historic launch of Doritos Locos Tacos, and the July launch of the Cantina Bell, an initiative designed to broaden the appeal of Taco Bell. We've made major headway at Taco Bell and I'm extremely optimistic," Novak said.
Yum Brand's International Division system sales increased 7 percent, prior to foreign currency translation. Of that, the emerging markets system sales grew 13 percent, driven by 9 percent same-store sales growth and 7 percent unit growth. Developed markets system sales grew 2 percent, driven by 1 percent same-store sales growth.
YRI opened 172 new units in 45 countries. For the quarter, 108 new units were opened in emerging markets. Franchise partners opened 91 percent of all new units.
Restaurant margin decreased 1.1 percentage points driven by increased costs in Thailand and a same-store sales decline in KFC France. While same-store sales declined in KFC France, system sales grew 6 percent due to unit growth.
Novak said a standout strength for YRI is Russia, which boasts a "long, long runway for future growth." Yum! also continues to aggressively expand throughout Africa, and expects to have a footprint in 20 African countries by the end of the year.
Yum!'s India Division experienced a system sales increase of 32 percent, prior to foreign currency translation. The system sales increase was driven by unit growth of 29 percent and same-store sales growth of 7 percent.
In India, Yum! currently has 479 restaurants, including three Taco Bell units, 212 KFC un its, 168 Pizza Hut casual dining and 96 Pizza Hut home service. The latter represents a 68 percent increase from the prior year.
Second quarter highlights
- Worldwide operating profit grew 7 percent, prior to foreign currency translation, including 26 percent in the U.S. and 6 percent at Yum! Restaurants International (YRI).
- Operating profit declined 4 percent in China.
- Worldwide operating profit increased 8 percent, after foreign currency translation. Worldwide system sales grew 8 percent, prior to foreign currency translation, including 27 percent in China, 7 percent at YRI and 1 percent in the U.S.
- Same-store sales grew 10 percent in China, 4 percent at YRI and 7 percent in the U.S. International development continued with 342 new restaurants opened, including 160 new units in China and 172 new units at YRI; 81 percent of this development occurred in emerging markets.
"I'm confident we're making our brands even more vibrant around the world. Our long-term growth prospects have never been brighter as we continue to deliver consistently strong annual results," Novak said.
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