Yum! Brands (NYSE:YUM), owner of the KFC, Taco Bell and Pizza Hut restaurant concepts, continues to build on the successes it has experienced overseas. Third quarter results released Wednesday offered another illustration of its international ambitions, and this is helping it build a stronger competitive edge.
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Recent Results
Total quarterly sales fell 2.2%, to $2.78 billion, as sales at company-owned restaurants declined 2% and lucrative franchise and license fee income fell 3.9%, though it only accounted for 12.5% of the total sales pie. Total systems growth, which includes company-owned and franchised locations, fell 4% as currency translations offset strong overseas growth (mainland China improved 11% and Yum International 4% in local currencies). The U.S. continued to struggle, and posted a 5% decline across all stores.
Despite the domestic top-line struggles, operating profit in the U.S. division improved 18%, to $171 million. Profit growth was also strong in China, up 32% to $217 million, while the other international regions posted a collective 13% decline in operating profits to $119 million on tough trends in Mexico and South Korea. Currency fluctuations also hit reported profit by $17 million, which accounted for nearly all of the quarterly decrease.
Overall expense controls helped boost total company operating profit 14%, to $470 million, and share buybacks served to boost earnings growth 19%, to 69 cents per diluted share. This came in ahead of analyst projections.
Outlook
Third quarter profit momentum will continue as management boosted its full-year earnings guidance to $2.10, to $2.14, for approximately 12% year-over-year growth. It also sees double-digit profit growth continuing into 2010 and expects 10% earnings growth.
The Bottom Line
China continues to be the growth engine for Yum! but the U.S. division has started to contribute meaningfully to the bottom line as it sells off company-owned stores and also saw a nice boost from lower commodity and food costs. However, same-store sales declined 6% and were highlighted by a worrisome 13% decline at the Pizza Hut franchise.
U.S. sales are still significant to Yum! but China now accounts for a large portion of total revenues, and will only continue to influence driving sales and profit growth. Yum also has a considerable lead on the competition in China. Burger King (NYSE:BKC) opened its first store only a few years ago, while Wendy's/Arby's (NYSE:WEN) and Chipotle (NYSE:CMG) (NYSE:CMG.B) only operate in North America. Couple China with the international division, Yum! remains a compelling play for those seeking exposure to the less competitive overseas restaurant industry. (For more on investing in this sector, read Sinking Your Teeth Into Restaurant Stocks.)
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