Yum profit up as China keeps growing

KFC parent Yum Brands Inc reported fourth-quarter earnings that topped Wall Street’s view after accelerating sales and operating profit at established restaurants in China helped ease worries that growth in its top market was slowing.

The shares of the fast-food chain, which are up more than 25 percent from a year ago and trading around all-time highs, were up 2.3 percent to $64.62 in extended trading after Yum also reported better-than-expected restaurant sales growth in up-and-coming international markets.

“They demonstrated once again that they’re one of the best consumer plays on emerging markets,” said Tucker Brown, research principal at Sustainable Growth Advisors, which holds Yum in its SGA Global Growth Fund.

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China - the world’s fastest growing major economy - is Yum’s biggest earnings driver, accounting for just over 40 percent of overall profits.

[caption id=“attachment_205636” align=“alignleft” width=“380” caption=“Yum’s unexpectedly strong 21 percent gain in sales at established restaurants in China took many analysts by surprise. Reuters”]  [/caption]

Yum’s unexpectedly strong 21 percent gain in sales at established restaurants in China took many analysts by surprise. That result overshadowed an expected but still sharp rise in food and labor costs, which took a bite out of margins during the fourth quarter.

“I think the topline growth in China trumped the cost pressures in this case,” Morningstar analyst RJ Hottovy told Reuters.

Recent price increases also helped the company deliver a 15 percent operating profit for its China division and should help sustain high-quality growth, Brown said.

During the third quarter, Yum’s China same-restaurant sales rose 19 percent and operating profit was 7 percent.

Based in Louisville, Kentucky, the company has almost 4,500 restaurants, mostly KFC outlets, in China. In 1987, it was the first Western fast-food brand to enter China and now has far more restaurants than competitors such as McDonald’s Corp and Starbucks Corp .

Yum’s other brands in China are Pizza Hut, East Dawning and Little Sheep, in which it has a controlling stake.

China’s government is attempting to gently cool the country’s red hot economic growth, a prospect that has investors on edge because the growth helps underpin the global economy.

A Reuters poll in January showed China’s economic growth is likely to moderate to 8.4 percent from 2011’s 9.2 percent as demand at home and abroad slackens.

PROFIT BEAT

Yum’s net income in the fourth quarter ended December 31 grew 30 percent to $356 million, or 75 cents per share - topping analysts’ average view by 1 cent, according to Thomson Reuters I/B/E/S.

Same-restaurant sales at Yum Restaurants International (YRI) were up 3 percent during the quarter. That division included Yum’s other non-U.S. markets such as France, India and Russia.

Beginning in the first quarter, India will become a separate business segment at Yum.

While Yum’s business is robust in international markets, it has been working on a turnaround in its U.S. business.

Yum’s overall sales at U.S. restaurants open at least one year were up 1 percent in the fourth quarter. That included an expectations-topping 6 percent rise at Pizza Hut and declines of 2 percent at Taco Bell and 1 percent at KFC.

The overall growth of 1 percent “should be seen as a victory for the chronically underperforming US segment of the business,” said Channing Smith, managing director of Capital Advisors, which holds Yum in its Capital Advisors Growth Fund. He recommended that investors use any pullbacks in Yum’s stock price to build a position in the company.

Reuters