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Yum! Brands’ flagship KFC China business appears to be on the rebound after a challenging 2013 incited by a chicken supply crisis. The company’s Q2 results, announced during an earnings call Thursday, include a worldwide systems sales jump of 6 percent year over year.
CEO David Novak and CFO Pat Grismer also touted the bottom line benefits of Taco Bell’s new breakfast lineup.
The picture wasn’t all rosy for the company, however. Pizza Hut U.S. continues to struggle in an increasingly competitive pizza segment, with same-store sales down 4 percent, and system sales down 2 percent.
"Obviously we’re disappointed with the second quarter, which was particularly poor in the U.S., which makes up about half the company," Novak said. "We fell well short of our expectations."
Of note, Novak called the brand's first quarter results "disappointing" as well, in April. Grismer went so far as to say the brand is currently in a turnaround mode. It is not holding back from making strategic investments to right the ship, he added, with "major" initiatives planned for Q4, including advertising positioning and digital activations aimed at Millennials.
"We will sharpen our focus on value to leverage competitive offers to drive digital activations," Novak said. "Our goal is to catch up to and surpass the competition on the digital front in 2015. This business ebbs and flows against the competition throughout the years and I can assure you we’ll be back."
That competition, specifically Papa John's and Domino's, has hit or approached 50 percent of all sales from digital channels. Pizza Hut's digital sales were about 30 percent in January.
Novak said throughout the past two years, Pizza Hut has been outgrowing its competition and will turn in net new unit growth for the fourth consecutive year. As the brand continues its "turnaround" efforts, the U.S. system will mine best practices from the global system to drive sales growth, and will continue to focus on delivery and express channels.
"We’re bullish on the long-term growth progress at Pizza Hut."
China growth provides optimism
Pizza Hut’s success story continues to originate from China, where the brand faces "hardly any midscale competition," according to Novak. He added that two-thirds of Pizza Hut’s sales now come from non-pizza items, which helped drive a 16-percent same-store sales increase in Q2.
The system is experiencing two-year cash payback returns, which has also helped the brand grow into lower tier cities. The company expects to have more than 1,200 units by the end of this year, which is more than double from three years ago.
The Pizza Hut Home Service business is presenting much opportunity as well. More than 40 percent of this menu consists of Chinese food, borrowed from Yum’s East Dawning fast food concept.
"We believe we’ve innovated a way to offer a box meal in a scalable fast food format," Novak said. "We believe we backed our way into the Chinese fast food format with great economics that allow us to get some dramatic expansion in the future. It’s small box, so the investment costs are not that significant."
The 200-unit business now exists in 26 cities and is ready to "rapidly" scale across the country. Novak said demand for the small-box concept is "enormous."
Still, although Pizza Hut Casual Dining in China is a bright spot for Yum! Brands, the business turned in flat same-store sales numbers for Q2. Novak said the brand is underperforming globally but has the initiatives in place for a "much stronger" 2015.
"We have a very good brand, the best brand we think in the category. And we've underperformed versus competition. And we think we will make significant progress next year," he said.
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