Yum Profit Tops Estimates, Helped by Cheap Chicken

Yum! Brands Inc., owner of the KFC and Taco Bell fast-food chains, posted third-quarter profit that topped analysts’ estimates as relatively cheap chicken helped hold down costs.

Net income more than doubled to $404 million, or 89 cents a share, from $152 million, or 33 cents, a year earlier, the Louisville, Kentucky-based company said in a statement yesterday. Excluding some items, profit was 87 cents a share in the period, which ended Sept. 6. Analysts projected 83 cents.

Yum, which has more than 4,400 KFC fried-chicken restaurants in the U.S., is benefiting as the cost of poultry rises more slowly than the beef that many of its fast-food competitors rely upon. Prices for whole chickens sold by farmers in Georgia, the biggest producing state, have gained 9.1 percent this year, less than the 22 percent increase for U.S. wholesale beef prices. Yum’s food and paper costs in the quarter fell 4.5 percent to $951 million.

“Their food and paper expense was essentially flat” as a percentage of sales, said Peter Saleh, a New York-based analyst at Telsey Advisory Group, who has a “market perform,” or hold, rating on the shares. “Chicken is not all that inflationary.”

Yum shares rose 1.4 percent to $70.74 at the close in New York. The stock has slumped 6.4 percent this year, while the Standard & Poor’s 500 Restaurants Index retreated 1.9 percent.

Yum remains under pressure in China, where it has more than 6,400 restaurants, after a second food-safety scare drove customers away from its KFC and Pizza Hut chains. Same-store sales fell 14 percent in China in the quarter. The company in September reported a preliminary decline of about 13 percent after supplier OSI Group LLC was investigated for altering expiration dates on food.

China Recovery

“It is difficult to confidently forecast the exact trajectory of China sales,” Yum, which has terminated its relationship with OSI, said in yesterday’s statement. “Sales typically take six to nine months to recover from these types of events.”

In China, the company has started requiring that suppliers use television monitors and is working on a whistle-blower system to encourage employees to report potential food issues, Chief Executive Officer David Novak said on a conference call today. The company also is planning to introduce new items at KFC next year to attract diners, he said.

Total third-quarter revenue fell 3.2 percent to $3.35 billion, missing analysts’ $3.37 billion average projection.

Earnings per share, excluding special items, will rise 6 percent to 10 percent this year, Yum said yesterday. That’s down from a previous projection for growth of at least 20 percent.

The fast-food company also is struggling in the U.S., where Pizza Hut is trying to compete with peers offering steep discounts and new items. Comparable-store sales for Pizza Hut in the U.S. declined 2 percent.

Taco Bell

One bright spot has been the Taco Bell chain, which is attracting U.S. customers with new protein-heavy fare and a menu of items priced at $1. The Mexican-food chain introduced the Dollar Cravings lineup in August with fare including mini quesadillas and cinnamon twists. The company has more than 6,100 Taco Bell locations.

Sales at Taco Bell locations open at least a year rose 3 percent in the third quarter. KFC’s same-store sales advanced 3 percent, and the company’s revenue by that measure fell 4 percent in India.

Comparable-store sales are considered an indicator of a retailer’s performance because they include only older, established locations.

Beginning next year, Greg Creed will take over as Yum’s CEO when Novak becomes executive chairman. Creed has led Taco Bell since early 2011.

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