Pizza Hut accelerates growth in emerging markets

Yum! Brands Inc. reported results for the second quarter ended June 16, including global system sales growth of 8 percent.

Although the company's profit missed analysts' expectations on slowed China growth, the company still anticipates a new-unit forecast of a record 1,700 international stores for 2012, including at least 700 in China.

CEO David Novak said China's operating profit was down 4 percent from last year largely due to a decline in restaurant margins. He expects this to be short lived, however, as menu initiatives take hold and inflation moderates.

"The China economy is slowing and sales will likely soften, especially as we overlap a strong performance from last year," Novak said in an earnings call held this morning. He reiterated the "tremendous" potential that remains in China, citing that Yum! Brands has four restaurants per million people there, versus 60 per million in the U.S.

There are currently 696 Pizza Huts in China and the brand continues to open in lower tiered cities, relatively new markets for the brand. Pizza Hut refreshes 25 percent of the menu twice a year, which continues to drive same-store sales growth in that country.

Additionally, Novak said the Pizza Hut Home Service brand continues to make progress in China.

In India, Yum! currently has 479 restaurants, including three Taco Bell units, 212 KFC un its, 168 Pizza Hut casual dining and 96 Pizza Hut home service. The latter represents a 68 percent increase from the prior year.

Pizza Hut U.S.

In the U.S., Pizza Hut turned in a solid quarter of 4 percent same-store sales growth. Yum!'s U.S. Division overall was up 7 percent, behind a 13 percent jump from Taco Bell. KFC's same-store sales were up 1 percent.

Novak said Pizza Hut U.S. continues to focus on value through its $10 large pizzas and bundled meals. The brand is also leveraging its entry into the sandwich category, with the recent launch of the P'Zolo line.

Of particular note, Pizza Hut is in the midst of its second consecutive year of new unit growth after a decade of declines, according to CFO Pat Grismer.

"Overall, the U.S. business had a strong first half and I'm confident we're improving our business model in the U.S.," Novak said.

Second quarter highlights

  • Worldwide operating profit grew 7 percent, prior to foreign currency translation, including 26 percent in the U.S. and 6 percent at Yum! Restaurants International (YRI).
  • Operating profit declined 4 percent in China. Worldwide operating profit increased 8 percent, after foreign currency translation.
  • Worldwide system sales grew 8 percent, prior to foreign currency translation, including 27 percent in China, 7 percent at YRI and 1 percent in the U.S. Same-store sales grew 10 percent in China, 4 percent at YRI and 7 percent in the U.S.
  • International development continued with 342 new restaurants opened, including 160 new units in China and 172 new units at YRI; 81 percent of this development occurred in emerging markets.

Read more about operations management.

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