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Yum! Brands' 3Q Propelled by China, Emerging Markets

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Yum! Brands (NYSE: YUM), which is the parent company of the KFC, Taco Bell and Pizza Hut restaurant chains, beat analyst estimates for the third quarter due to good revenue growth and higher profit margins in its China division. China made up 55 percent of group sales during the third quarter and 50.2 percent of group revenues for the nine months ended September 8, 2012. YUM saw good growth in its U.S. division and accelerated its expansion in the new India division. The company increased its full-year EPS guidance from 10 percent growth to “at least 13 percent,” said David Novak, chairman and CEO.

Revenues in China increased by 22 percent before currency translation and sales at restaurants open for at least one year increased by six percent. YUM reported that profit margins increased by 0.1 percentage points to 21.4 percent despite wage inflation of eight percent and a two percent increase in commodity prices.

In the U.S. division, restaurant margins increased by 4.6 percentage points to 16.7 percent as same store sales increased by six percent and costs improved through refranchising, improving supply chain efficiency and less discounting.

During the third quarter conference call this morning, Novak said, “Our new unit opportunity in China is the best in retail and our opportunity to expand is now bigger than ever throughout the emerging markets.” Novak continued, “About 60 percent of our profit is generated in emerging markets.” Novak sees opportunities for growth from the fact that there are only two restaurants per million people in emerging markets compared to 58 restaurants per million people in the United States.

Novak also noted that there are 38,000 restaurants with “underutilized assets.” Same store sales can be expanded by adding new menu items, such as breakfast and beverages. “Unlike most companies, we don't have to look for growth,” Novak said, “It's staring us right in the face every day.”

It is still early days for YUM in India but sales there increased by 29 percent before currency translation. Much of this growth was due to new expansion but sales at restaurants open for at least one year were up by five percent during the third quarter.

The company's emphasis on emerging markets is also evident in the YUM! Restaurants International Division where some of the fastest revenue growth was seen in Africa, up 20 percent, and in Russia, up 45 percent.

YUM's continued dependence upon China for revenue and earnings raises the question of how well the company will be able to weather any slowdown in activity there. “China is going to have its inevitable ups and downs,” Novak said. But CFO Patrick Grismer told analysts that a “volatile and slowing economy” in China makes forecasting difficult. However, commenting on the outlook for the fourth quarter Grismer said, “At this point, our best estimate is that China same-store sales will be low single digits to flat."

Much of the slowdown in China is coming in industrial products, as evidenced by Alcoa's (NYSE: AA) third quarter results today, and in luxury goods. YUM's third quarter numbers may indicate that consumption by middle-class Chinese may be more resilient than the broad economic numbers might indicate.

In early afternoon trading, YUM is up 8.5 percent to $71.29.

Posted-In: David NovakEarnings News Guidance Management Best of Benzinga

 

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