Yum! Brands to focus on sales 'layers' in 2010

Yum! Brands to focus on sales 'layers' in 2010
Tags: Chicken, Food & Beverage, Franchising & Growth, Italian/Pizza, Mexican, Operations Management, Seafood
February 4, 2010 - Christa Hoyland

Yum! Brand's chairman, president and CEO David Novak told investors he was pleased with the company's strong year of performance despite the tough macro environment in the company's fourth quarter earnings call on Thursday.

For the fourth quarter ended Dec. 26, 2009, worldwide same-store sales for the quarter were slightly negative, with comps down 3 percent in mainland China and 2 percent in other international markets. U.S. comps were down sharply by 8 percent, with Pizza Hut leading the slide with a decline of 12 percent. KFC was down 8 percent, and Taco Bell was down 5 percent. For the year, comps in China were down 1 percent and down 1 percent in other international markets. U.S. yearly comps were down 5 percent.

With China's comps down, Novak dismissed concerns that the company was growing too fast in the country, instead blaming an "off year for the Chinese consumer."

"Suffice it to say, we still believe China holds great potential, and we're clearly in the early innings of building our business in this massive and growing economy," he said.

The company is pushing forward with its emphasis on sales layers as announced in its annual investor update in December. For Yum! Restaurants International, that means the expansion of the Crushers line of frozen beverages at KFC and Pizza Hut moving to a casual dining focus, a successful strategy for the China market. In China, KFC has found success with the addition of home delivery, breakfast and more protein items such as shrimp.

In the United States, Taco Bell's value positioning seems to be working, and the company is prepared to move forward with breakfast, which should launch nationally in 2011, as well as other previously announced initiatives such as new beverages and a soft corn taco. The company is most optimistic about Taco Bell's potential in 2010, the company's strongest "U.S. growth engine," Novak said.

Pizza Hut and KFC face a number of challenges, and the company is "absolutely passionate about addressing" them, he said. Pizza Hut appears to be gaining with its $10 Any Way You Want It everyday promotion, a response to consumers' saying the pizza is too expensive. The brand's long-term strategy is to expand the brand beyond pizza to include pasta and wings, with new promotions this year. Premium pizzas are still in the pipeline.

KFC's Kentucky Grilled Chicken has added good mix for U.S. stores. The brand will focusing on improving operations, particularly speed of service and product availability. Novak expects a tough half-year ahead for the chicken chain, which will focus on value as well as more choice and better service.

"When you look at all our efforts, we are confident our U.S. business is heading towards more reliable and a more predictable earnings and cash flow," said Rick Carucci, Yum! chief financial officer. "We expect stronger growth in the back half of 2010. And yes, part of the reason for that is we lapped weaker results from the last half of 2009."

Carucci told investors during the call that the company does not expect a strong economic turnaround in 2010 and has built its plans accordingly. Having learned from challenges in 2009, the company is better prepared moving forward, even as it expects first quarter sales to be below normal growth rates. The company does expect to benefit from better foreign currency exchange rates.

Growth, financial results

Regarding growth, international development for the year continued at a strong pace, adding 1, 467 units, including a record 509 new units in mainland China and 898 new units for Yum! Restaurants International. The company's U.S. refranchising program exceeded company goals, as it refranchised 541 units, including 427 Pizza Huts, 60 KFCs and 54 Taco Bells.

The company 's U.S. multibranding program will be limited going forward, especially as it relates to the co-branding of Long John Silver's and A&W.

Total revenues for Q4 were $3.4 billion, relatively flat compared to the same period last year. Year-to-date revenues were down 4 percent to $10.8 billion, compared to $11.3 billion the prior year.

The company's net income improved 6 percent to $216 million for the quarter, compared to $204 million in the same period last year, as the company improved worldwide restaurant margins by 1.7 percent. Year-to-date net income was up 11 percent at $1.07 billion, compared to $964 million the prior year.

"Our goal is to provide more meaningful menu variety to our customers and leverage our assets throughout the day," Novak said. "We are putting these same building blocks in place to drive long-term growth at Taco Bell in the U.S., where we are also making steady progress transforming and restructuring our Pizza Hut and KFC businesses."