Yum! Brands (NYSE:YUM), owner and operator of the Taco Bell, KFC and Pizza Hut restaurant concepts, is increasingly looking abroad to keep its growth prospects chugging along. More specifically, it has honed in on China for aggressive expansion to keep bringing home the bacon for shareholders. The strategy is somewhat risky, but so far is working out quite well, as first quarter results demonstrated.
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First Quarter Overview
Total reported sales fell 8% to $2.22 billion. Yum! breaks its results into three primary geographies, led by the China division which reported 16% system sales growth. It was strange to see that growth was only 12% when stripping out currency fluctuations, which was due to the fact the Chinese yuan is pegged to the dollar to keep the yuan low and the cost of Chinese exports favorable. (Read Floating And Fixed Exchange Rates for more information.)
In contrast, the dollar has appreciated against most other currencies, which explains the fact that the Yum! Restaurants International division reported negative sales growth of 3%, but grew 10% when removing currency moves during the quarter on double-digit growth in key markets including the UK, Latin America, Middle East, and rest of Asia. This was a common industry theme. For example, McDonald’s (NYSE:MCD) reported 2% sales growth in constant terms, but negative 10% including currency in its first quarter.
Yum! Brands' U.S. operating results continued to lag, with a 2% dip in same-store sales, attributed to "a weaker-than-anticipated consumer environment primarily impacting the dinner occasions at KFC and Pizza Hut." Rivals are also struggling stateside. On Wednesday, Burger King (NYSE:BKC) reported preliminary results where sales for March were lower than expected.
Other peers, such as Sonic (Nasdaq:SONC) and Wendy’s (NYSE:WEN) are introducing value menus to jump start U.S. demand. For now, Yum! Brands is focused on the cost equation. Operating profits improved 7% on "proactive reductions in our U.S. cost structure and improved restaurant margin," as management looks to sell off company-owned stores and fund international expansion. Yum! Brands detailed that it sold 109 stores during the quarter, reducing its ownership to 18% of domestic stores.
Reported operating profit in China shot up 27%, fell 11% at YRI (but was up 4% excluding effects of foreign exchange), which resulted in an overall company profit decline of 18% to $351 million. Lower taxes and share buybacks helped minimize the damage to the bottom line as diluted earnings fell to $0.46 from $0.50 a year earlier. This came in above analyst estimates.
The Bottom Line
Yum! Brands expects to report full-year earnings of $2.10 per share, which would represent about 10% growth from last year. China will continue to be the engine of growth; it opened 98 new stores in the first quarter and has plans for 475 openings throughout the year. Though it may be risky, as over dependence on one region could come back to haunt it (remember the 2006 Taco Bell food scare?), for now it is a competitive advantage that few rivals have on their plates.
