By Maria Armental
Yum Brands Inc.'s operations in China improved but continued to
drag on overall results in the latest quarter, contributing to
weaker-than-expected sales and profits that pushed its stock
down.
The owner of the KFC, Pizza Hut, and Taco Bell chains on Tuesday
said net profit in the quarter through June 13 fell 30% to $235
million, driven partly by one-time charges.
China accounts for about half of Yum's sales and is at the
center of the company's expansion plans, but sales have been
battered in the past several years by reports questioning the
quality of its food.
Yum said sales in China fell 4% in the second quarter, with
sales at stores open for at least a year declining 10% and
offsetting growth in the number of restaurants. Yum had already
warned results would be worse than the year-ago period. However,
the decline marked an improvement from the first quarter, when
sales at established stores fell 12%, and the fourth quarter
decline, when they dropped 16%.
In June, the Louisville, Ky., company said it was suing rival
companies in China for spreading false information, including
photos of chickens with six wings and eight legs. This followed
reports last summer that a KFC supplier had intentionally sold
expired meat and, in late 2012, that another KFC supplier used
growth hormones and antibiotics to make chickens grow faster.
To improve sales in China, Yum revamped its marketing and menus,
including adding premium coffee and healthier alternatives like
herbal tea and seafood at KFC restaurants. And the company opened
Atto Primo, a high-end Italian restaurant, in Shanghai's Bund, the
city's historic waterfront.
Yum spokesman Jonathan Blum said the restaurant is a "one-off
incubator for potential new products" for Pizza Hut. "We are very
bullish on our long-term prospects" in China, Mr. Blum said.
Analysts and investors have speculated that Yum might split off
its China operations. The company hasn't ruled that out, but has
emphasized its continued expansion there, saying on Tuesday that it
remains on track to open at least 700 restaurants there this year,
just shy of the 737 units opened last year and accounting for about
a third of the company's planned 2,100 restaurants abroad.
Overall, Yum reported profit of $235 million, or 53 cents a
share, compared with $334 million, or 73 cents a share, a year
earlier. Excluding special items, earnings fell to 69 cents a share
from 73 cents a year earlier.
Revenue, which includes franchise and license fees, fell 3% to
$3.11 billion. Exchange-rate changes lowered operating profit by
$22 million, Yum said.
Analysts surveyed by Thomson Reuters projected 63 cents a share
on $3.19 billion in revenue.
Worldwide sales rose 3%, while restaurant margin remained at
15.5%.
By brand, sales rose 9% at Taco Bell, 6% at KFC and 1% at Pizza
Hut.
Shares, which have outperformed the S&P 500 by nearly 24
percentage points this year, fell 1.2% to $90.80 in late
trading.
Corrections & Amplifications
Foreign-currency translation lowered Yum's second-quarter
operating profit by $22 million. An earlier version of this article
incorrectly said it had lowered revenue.
Write to Maria Armental at maria.armental@wsj.com
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