GLOBAL - Yum! Brands' third-quarter report shows a slight increase in global sales and reduced margin and operating profit. Lower sales in China are attributed to an undercover report in July, depicting improper food handling practice at one of the company's suppliers.
Yum! Brands, Inc. has reported results for the third quarter ended 6 September 2014, including earnings per share (EPS) of US$0.87, excluding Special Items. Reported EPS was $0.89. The Company now estimates 2014 EPS growth to be between six and 10 per cent versus prior year, excluding Special Items.
Third Quarter Highlights
Yum!'s worldwide system sales grew one per cent. Worldwide restaurant margin decreased 2.7 percentage points to 14.9 per cent, and worldwide operating profit decreased 12 per cent.
A total of 400 new restaurants were opened across the world, 77 per cent of this development occurred in emerging markets.
China Division system sales declined nine per cent, as six per cent unit growth was offset by a 14 per cent same-store sales decline. Restaurant margin decreased 4.6 percentage points to 14.9 per cent. Operating profit decreased 38 per cent.
KFC Division system sales increased six per cent, driven by two per cent unit growth and three per cent same-store sales growth. Restaurant margin increased 1.0 percentage point to 13.4 per cent. Operating profit increased 16 per cent.
Pizza Hut Division system sales were even, as two per cent unit growth was offset by a one per cent same-store sales decline. Restaurant margin decreased 1.0 percentage point to 8.9 per cent. Operating profit decreased two per cent.
Taco Bell Division system sales increased four per cent, driven by two per cent unit growth and three per cent same-store sales growth. Restaurant margin increased 1.8 percentage points to 20.7 per cent. Operating profit increased 14 per cent.
India Division system sales increased 14 per cent, driven by 26 per cent unit growth which was partially offset by a four per cent same-store sales decline.
Worldwide effective tax rate decreased to 22.4 per cent from 33.1 per cent, benefiting EPS by 14 percentage points.
Foreign currency translation negatively impacted operating profit by $6 million.
On 10 September 2014, the Company announced an 11 per cent increase in its quarterly dividend, marking the tenth consecutive year the dividend increased at a double-digit percentage rate.
On 20 July, an undercover report was televised in China depicting improper food handling practices by supplier Shanghai Husi, a division of OSI, which is a large, global supplier to many in the restaurant industry.
This triggered extensive news coverage in China that has shaken consumer confidence and impacted brand usage. Subsequently, the Shanghai FDA launched an investigation into this matter, alleging illegal activity by OSI. Upon learning of these events, Yum! terminated its relationship with OSI globally, with minimal disruption to its menu offerings in China.
Even though OSI was a minor supplier, sales at KFC and Pizza Hut were disproportionately impacted given the company's category-leading positions. While sales are rebounding, they continue to be negative. Its brands have proven resilient over time and the company expects this to be the case with this situation as well.
Revised 2014 Outlook
It is difficult to confidently forecast the exact trajectory of China sales. In Yum!'s experience, sales typically take six to nine months to recover from these types of events. With the assumption that China same-store sales continue to improve but are negative for the fourth-quarter, the company now estimates 2014 EPS growth to be between six and 10 per cent versus prior year, excluding Special Items.
David C. Novak, Chairman and CEO said: "I'm absolutely confident in Yum! Brands' ability to deliver strong, sustainable growth in the years ahead despite the recent supplier incident in China, which has significantly impacted China sales, leading us to reduce our full-year EPS outlook.
"China sales are on the path to recovery and we expect to develop at least 700 new restaurants in China this year, which we're confident will ultimately deliver high returns as we further capitalize on the world’s fastest growing consuming class.
"Outside of China, we expect continued solid sales and profit growth at our KFC division, led by strong international performance and improving US results. At Taco Bell, we’re extremely pleased with restaurant margins of nearly 21 per cent in the quarter and the overall results of our breakfast offering, which has given us a new growth platform to build upon in the years to come. At Pizza Hut, we are making progress with our US turnaround and have major actions in place to drive same-store sales growth balance of year and beyond.
"Overall, our business model is compelling and we firmly believe we are building momentum behind major initiatives around the world that will drive strong sales and profit growth in 2015. We remain focused on the three keys to driving shareholder value: new-unit development, same-store sales growth and generating high returns on invested capital," added Mr Novak.
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