What is in this article?:
- Yum 2Q profit falls 15%
- U.S., YRI produce steady results
Performance in the China division is improving but continues to dampen company-wide results.
As expected, a 20-percent decrease in same-store sales in its China division weighed down second-quarter results for Yum! Brands Inc., as KFC continues to suffer the effect of negative publicity in China stemming from questions of the quality of that nation’s poultry supply.
Chief executive David Novak stressed menu development and value strategies as a roadmap to recovery in China during Yum’s earnings call, but his statement also could apply to the company’s U.S. and international divisions, which partially offset a steep decline in China’s second-quarter profit.
“If you innovate, provide everyday value, and operate the business well with good service, you can win,” he said. “We think it’s a winning proposition over the long term.”
Yet in the near term, Yum’s second-quarter net income fell 15 percent to $281 million, or 61 cents per share, compared with $331 million, or 69 cents per share, a year earlier.
For the June 15-ended quarter, Yum’s revenue fell 8 percent to $2.9 billion. The China division’s steep drop in same-store sales offset gains of 1 percent in both Yum Restaurants International and the United States, and a 2-percent increase in the India division.
No ‘overly dramatic’ moves in China
While KFC, Yum’s largest chain in China by far, has struggled in China this year, Yum executives were optimistic that same-store sales in the division would continue to improve sequentially and eventually turn positive by the end of the year. In June, the division’s same-store sales decrease narrowed to 10 percent, from 19 percent in May.
KFC’s same-store sales fell 13 percent in June, offset by a 6-percent increase at Pizza Hut Casual Dining. The chicken chain has run a quality assurance advertising campaign since April and is promoting a value offering around chicken wings this summer, but no major price increases are planned this year, chief financial officer Patrick Grismer said.
“Our No. 1 goal at KFC is to regain the traffic we’ve lost, and we’re confident we can do that based on the trends we’ve seen to date,” Grismer said. “The situation is different at Pizza Hut, where we’ve taken some pricing this year consistent with the growth model for the business.”
In fact, no step-change initiatives are on the docket for KFC China, Novak said, aside from the 700 unit openings Yum already had projected for 2013. “We never go after recovery at any cost; we have a business to run,” he said. “We’re basically running the business the way it ought to be run so that we’re relevant on a continual basis. We’re not doing anything overly dramatic.”
Pizza Hut Casual Dining’s 7-percent growth in same-store sales for the second quarter gave Yum officials confidence in the chain’s growth projections and the potential for China’s economy outside of the chicken supply issues that have hurt KFC.
“The biggest thing we see going on is the consuming class continues to grow,” Novak said. “It’s 300 million people today and on pace to be 600 million by 2020, and you also see disposable income growing as well. The economy itself is growing by 7 percent, which is still the fastest in the world. These all bode well for brands that are consumer-oriented.”
He added that the country’s rapid urbanization and infrastructure expansion — including, for example, the building of several dozen airports in the country — would provide growth opportunities over the long term.
Aside from KFC China’s on-schedule recovery, Novak said, providing everyday value and innovative menu items across Yum’s system in China would be most important to the segment’s return to outsize sales and profit growth. “Pizza Hut is great evidence of this,” he said. “If you have innovation and value, you can have very strong same-store sales growth and open new units profitably, move into lower-tier cities, and expand aggressively, despite all the headwinds in the market.”