News

KFC continues to challenge Yum!'s U.S. sales

July 13, 2010

Yum! Brands is pleased that its operating profits are up across all divisions, even though same-store sales were down in the United States and up only 1 percent in its international segment. The company announced its second quarter earnings today during a conference call for the period ended June 12.

In the United States, KFC dragged down Yum!'s same-store-sales with a decline of 7 percent, contributing to a 1 percent decline in U.S. comps overall. Same-store sales were up 8 percent at Pizza Hut and 1 percent at Taco Bell.

David C. Novak, Yum! chairman and CEO, said he expects KFC sales to remain soft in the fiscal Q3, even though the brand is committed to its turnaround strategy to improve operations and its bone-in chicken. The company will continue to focus on value and offer a balance of menu offerings, including more portable options, for the KFC brand.

Novak said KFC is on track with its strategy to improve its sales but noted the turnaround will take some time. "There is no quick fix," he said.

Regarding its balanced menu offerings, Novak is pleased that the brand has seen the largest improvement in the quick-service industry for customer satisfaction, largely due to the addition of the grilled chicken line. Grilled chicken has made the KFC brand more relevant in the U.S. and is now 10- to- 15 percent of the mix.

Novak recognizes that focusing on value is somewhat difficult for KFC, whose pricing edges toward casual dining. Still, the KFC team is working hard and is "relentless" in its efforts to improve the brand, including pushing the franchise system to improve operations.

Those improvements may also mean the closing of some stores. "You have to have a quality system," Novak said. "I'd rather have 4,500 great looking KFCs than 5,000 with 500 looking at being drive-by assets."

The company is confident that Pizza Hut's sales will remain strong as the brand continues to focus on value and the $10 price point. The brand is seeing most of its sales from the $10 any-size pizza positioning but also is experiencing success with TuscaniTuesday's focus on pasta and is experimenting with a WingsWednesdayspecial.

Taco Bell in the U.S. is focusing on building sales layers in order to support the brand's plans for growth. The brand sees opportunities in its beverage and home meal replacement platforms. Breakfast will provide the next layer, and launching the line is a "question of when," not whether the daypart will be added.

With its transaction growth and slight increase in sales, Taco Bell has a "bright future" in the U.S., Novak said.

Meanwhile, refranchising efforts continue nationwide, particularly for Pizza Hut and KFC. Year to date, Yum! has sold 71 restaurants for a total of more than 1,300 units across all brands since the inception of the refranchising program in late 2007. The company expects to complete its U.S. refranchising efforts during 2011.

Yum! China, international

The company is especially pleased with its leading position in China, where Yum!'s same-store sales grew 4 percent. The company continues to expect moderate year-over-year margin improvement for the full year as it anticipates labor and commodity inflation in the second half of 2010.

Yum! Restaurants International (YRI) same-store sales grew 1 percent for the second quarter including a 1 percentage point benefit from the timing of Chinese New Year.

Stores in the company's emerging markets led the division's system sales growth with a 10 percent increase, while system sales in developed markets were flat. The company expects its largest opportunity to come in these markets, which should continue to contribute significantly to the company's profits in coming years.

System sales in new growth markets — France, Russia and India — were up 13 percent, followed by a 12 percent increase in the Middle East. YRI opened 175 new units in almost 50 countries, with franchisees opening 89 percent of the new units.

OnJuly 1, the company completed the exercise of its option with its Russian partner and now has full management control of the KFC-Rostik’s brand in Russia and the Commonwealth of Independent States (CIS). This market includes more than 150 co-branded KFC-Rostiks restaurants across Russia and the CIS, of which Yum! now owns approximately 50 with the remainder owned by franchisees.

Foreign currency translation positively impacted operating profit by $14 million for the second quarter and $28 million year-to-date.

Financial results

Revenues were up 4 percent for the quarter at $2.57 billion, compared to $2.48 billion in the same quarter last year. Year to date, revenue was up 5 percent at $4.92 billion, compared to $4.69 billion last year.

Income was down 6 percent for the quarter to $286 million, compared to $303 million last year. Year to date, income increased 1 percent to $527 million, compared to $521 million last year.

“We are also pleased to report 10 percent operating profit growth in the U.S., despite flat same-store-sales," Novak said. "Our primary focus is to drive same-store-sales growth during the balance of year given the challenging consumer environment. At Yum! Restaurants International, we increased system sales by 4 percent prior to foreign currency translation benefit. We expect stronger sales and profit growth for the balance of the year at YRI.

“Overall, we are encouraged with our strong performance in a difficult macro-economic environment. Longer term, we continue to drive aggressive, international expansion while maintaining our industry-leading return on invested capital as we provide cash to shareholders through dividends and share repurchases.”

Conference call

A replay of Yum! Brands' conference call will be available for playback through midnightJuly 28, 2010.To access the playback, dial (800) 642-1687 in the U.S. and (706) 645-9291 internationally. The playback pass code is 84264468.

The replay of the webcast can be accessed via the internet by visiting Yum! Brands’ Web site,www.yum.com/investorsand selecting “Q2 2010 Earnings Conference Call” under “Investors: News and Presentations.”