Pizza Hut China continues to drive big profits

During the second quarter of last year, Taco Bell was reeling from a debilitating lawsuit questioning the content of its beef filling. The chain, which generates 60 percent of Yum! Brands' business, was down a full 5 percent, and stayed in the red throughout the rest of the year.

Recovery seems to be fully realized now, however. Louisville, Ky.-based Yum! Brands reported its Q1 2012 earnings Wednesday, which included a staggering 73 percent jump in profits.

As has been the story for the past couple of years, Yum! Brands also experienced a lift from a strong international presence, led by China.

"Each of our divisions produced impressive sales. The international business is our growth engine and Yum's strongest performances are located where high growth is expected in years ahead. We're also optimistic about improving our U.S. brands," said CEO David C. Novak on an earnings call this morning.

Q1 highlights

First quarter highlights include:

  • Worldwide operating profit grew 15 percent, prior to foreign currency translation, including 14 percent in China, 9 percent at Yum! Restaurants International (YRI) and 27 percent in the U.S.
  • Worldwide system sales grew 7 percent, including 28 percent in China, 8 percent at YRI and 1 percent in the U.S.
  • Same-store sales grew 14 percent in China, 5 percent at YRI and 5 percent in the U.S.
  • China new unit development set a first-quarter record with 168 new restaurants. Total international development was 297 new restaurants.

China

Yum has long had a solid presence in China, beginning with its first KFC unit opening there in 1987. The country now includes about 4,500 Yum! Brands restaurants which generated $908 million in operating profit for the company in 2011.

KFC has 3,819 restaurants in 800 cities and continues to expand behind its localized menu. Virtually all KFCs serve breakfast, which makes up 6 percent of its sales, while over half feature delivery and also over half are open 24/7. Despite its strong footprint and sales generation, Novak said KFC is in the early phases of development in China.

Pizza Hut is a top casual dining brand in China, with 662 restaurants open across multiple-tiered cities. The brand's strength in that country can be attributed to its diverse menu, which is refreshed twice a year by 25 percent. The Pizza Hut Home Service is also growing swiftly, with 136 units now in operation.

"Home delivery and 24-hour service is available in half of our stores, so we're in the embryonic stages. Value is what we're doing now, so we're more affordable to a consuming class that is going to double to 600 million people in the next eight years," Novak said.

Yum! International

The Yum! International division continues to experience high growth in emerging markets, namely Russia and Africa. Novak said the company plans to enter several new African countries this year, and have a presence in 20 total by the end of 2012.

France and Germany are also making "solid progress," according to Novak, and Yum! has increased its market spend in those two countries accordingly. In 2010, its brands were featured in television ads for seven weeks, versus 27 weeks in 2011.

Finally, Yum! expects to open 100 new units in India this year. India has provided enough optimism that Yum! created a separate division in November 2011.

"With a 34 percent system sales growth, and a business model that is getting stronger every day, both in large and smaller cities, we think India is very similar to what we saw in China in our first 10 years (there)," Novak said.

United States

The U.S. strategy for Yum is to "dramatically improve brands and consistency," according to Novak. The U.S. Division's same-store sales were up 5 percent, including a 6 percent lift at Taco Bell, 5 percent at Pizza Hut and 2 percent at KFC.

This is compared to an "unexpected" 13 percent decline in U.S. profits for Q1 2011, which Novak attributed to commodity inflation and a decline at Taco Bell from its now-dropped lawsuit over food quality and subsequent negative publicity.

Yum! has put forth numerous initiatives to reverse those negative sales at its flagship U.S. brand, including a new marketing tag – "Liv Mas" – an initial "Firstmeal" launch and a new Cantina Bell menu test, designed to broaden the appeal across more demographics. Taco Bell's Firstmeal breakfast offerings will expand to 200 more restaurants this year, and the company expects an even strong second quarter because of the "historic" launch of its Doritos Locos Tacos launch.

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