Yum Brands Profit Tops Estimates as China Unit's Sales Gain

  • Pizza Hut turns in best performance among global chains
  • Company raises its annual forecast for operating profit

Breaking Down Yum Brands' 1Q Earnings

Yum! Brands Inc., which is planning to spin off its China unit this year, posted first-quarter profit that exceeded analysts’ estimates as sales climbed in the Asian nation.

Profit was 95 cents a share, excluding some items, in the period ended March 19, the Louisville, Kentucky-based company said in a statement Wednesday. The average of analysts’ estimates compiled by Bloomberg was 83 cents.

After struggling in China with a supplier scandal, more local competition and a tough economy, Yum’s operations there are starting to rebound, fueled by a growing middle class. Comparable-store sales rose 6 percent in China in the quarter. Analysts estimated a 2.1 percent gain, according to Consensus Metrix. The company still plans to separate its China unit, leaving it more reliant on its U.S. businesses.

“It is still a good idea to spin it off,” Bloomberg Intelligence analyst Jennifer Bartashus said. “China presents a lot of opportunity, but it’s not as large an opportunity as some people thought.”

Yum also said operating profit will increase 12 percent this year, up from a previous forecast of 10 percent.

The shares rose as much as 4 percent to $85.79 on Thursday in New York. Through Wednesday’s close, Yum had gained 13 percent this year, while the Standard & Poor’s 500 Restaurants Index advanced 5.6 percent.

China Opportunity

Despite its recent struggles, Yum has said there’s opportunity to expand in China. The company can grow from about 7,500 restaurants to 20,000 there, Chief Executive Officer Greg Creed said in March.

That’s why a consortium backed by sovereign fund China Investment Corp. has expressed interest in buying a majority stake in Yum’s China business, people with knowledge of the matter said recently. The investor group also includes KKR & Co. and Baring Private Equity Asia, according to the people.

Domestically, Taco Bell has been attracting customers with breakfast fare, along with new items including the Quesalupa -- a taco with a cheese-stuffed shell. Yum has said it wants to grow the brand overseas and will open its first location in China later this year.

Same-store sales, a closely watched metric in the industry, measure revenue at established restaurants. The estimates are compiled by Consensus Metrix.

  • Sales by that measure rose 1 percent at Taco Bell; analysts estimated an increase of 3.1 percent.
  • KFC’s same-store sales climbed 1 percent; analysts projected a 1.9 percent gain.
  • They increased 3 percent at Pizza Hut; analysts estimated they would rise 2.2 percent.

Yum’s total revenue fell 0.1 percent in the quarter to $2.62 billion. On average, analysts projected $2.66 billion.

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