KFC in China Depresses Yum Earnings

Taco Bell Remains Bright Spot With U.S. Sales Up 3%; Chain To Roll Out Breakfast

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Yum Brands, owner of the KFC and Taco Bell fast-food chains, posted fourth-quarter profit that exceeded analysts' estimates on sales gains at its international division. But even with better-than-expected earnings, Yum CEO David Novak said during the earnings call this morning that 2013 was "was frankly a very humbling year," thanks in part to the avian flu scare in China.

David Novak
David Novak

Profit excluding some items was 86 cents a share, the Louisville, Kentucky-based company said yesterday in a statement. Analysts estimated about 79 cents, on average. Revenue rose 0.6% to $4.18 billion, trailing analysts' projections.

The company reiterated its full-year forecast for at least a 20% increase in profit per share, excluding certain items. Fourth-quarter net income fell 4.7% to $321 million, or 70 cents a share, from $337 million, or 72 cents, a year earlier, the company said.

While Yum's KFC restaurants have been struggling to attract diners in China, the company has been expanding in emerging markets as well as boosting sales in nations including Russia and France. Yum gets about a quarter of its revenue from its international division, where sales at restaurants open at least a year rose 2% in the quarter. Analysts estimated a gain of 1.7%, according to Consensus Metrix.

Chinese ad campaign
For the full year, same-store sales declined 13% in China, while same-store sales grew 1% at Yum's international division and were flat in the U.S. For the fourth quarter, same-store sales declined 4% in China and 2% in the U.S. Same-store sales grew 2% at the international division.

In China, KFC same-store sales declined 15% for the year and 4% in the quarter; Pizza Hut's China same-store sales grew 4% for the year and 5% in the quarter.

The fourth-quarter sales decline in China comes as KFC tries to lure back diners after an outbreak last year of bird flu and the investigation of a former supplier for selling food with too much antibiotics. Recently, more cases of H7N9 avian influenza have been reported in mainland China and Hong Kong.

In November, KFC introduced a Chinese advertising campaign about quality assurance that featured store employees and poultry farmers. Last year it also offered a half-price chicken-bucket deal to help attract diners and boost flagging sales.

New launches
Mr. Novak said Tuesday morning that improvements to the supply chain and the quality assurance campaign has been successful, restoring consumer faith in KFC's product. Of China, he said, "we know we still have some work to do, but we are confident we are making progress with consumers and are pleased with the continued same-store sales improvement we're seeing so far."

While Yum's KFC restaurants have been struggling to attract diners in China, the company has been expanding in emerging markets as well as boosting sales in nations including Russia and France. Yum gets about a quarter of its revenue from its international division, where sales at restaurants open at least a year rose 2 percent in the quarter. Analysts estimated a gain of 1.7 percent, according to Consensus Metrix.

In the U.S., flat same-store sales for the year included growth of 3% at Taco Bell, and declines of 2% each at Pizza Hut and KFC. In the fourth quarter, same-store sales declined of 4% at Pizza Hut and 5% at KFC, which were offset by 1% growth at Taco Bell. That marks the eighth consecutive quarter of same-store sales growth at Taco Bell.

Breakfast rollout
Yum is addressing its sales woes in the U.S. with some new launches. Pizza Hut is introducing a revamp of its most popular pizza, the Hand-Tossed pizza. KFC broke a massive marketing campaign last spring for a new boneless-chicken product and launched a second iteration of that campaign with its latest tagline, #HowDoYouKFC, at the beginning of the year.

Restaurant competition in the U.S. has picked up as fast-food chains including McDonald's Corp., have struggled to attract customers amid shaky consumer confidence and steep discounts. Last month, the world's largest restaurant company posted fourth-quarter profit that was little changed as U.S. same-store sales fell 1.4%.

Taco Bell, which was named Ad Age's marketer of the Year last year, has been a bright spot for Yum in the U.S., performing well since it launched its Doritos Locos Tacos in 2012. The company said on its earnings call Tuesday morning that a massive national breakfast rollout is expected in the first half of 2014. Breakfast is currently available at many locations on the West Coast.

Pizza Hut spent about $239 million on U.S. measured media in 2012 , according to Kanta Media, while Taco Bell spent $280 million and KFC spent $263 million.

~~~ with Bloomberg News ~~~

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