Yum posts profit beat, raises 2011 estimate

LOS ANGELES Wed Jul 13, 2011 7:27pm EDT

A Taco Bell restaurant is pictured in Burbank, California April 19, 2011. REUTERS/Fred Prouser

A Taco Bell restaurant is pictured in Burbank, California April 19, 2011.

Credit: Reuters/Fred Prouser

LOS ANGELES (Reuters) - KFC parent Yum Brands Inc (YUM.N) raised its full-year earnings forecast after China helped deliver quarterly earnings for the company that topped Wall Street's forecast.

Yum shares rose 2.2 percent after hours.

Yum, based in Louisville, Kentucky, has more than 4,000 restaurants, mostly KFC outlets, in China. It is the largest Western restaurant brand in China, with far more restaurants than rivals like McDonald's Corp (MCD.N) and Starbucks Corp (SBUX.O).

Based on strength in China and other international markets, Yum raised its full-year earnings per share growth forecast to at least 12 percent from at least 10 percent previously.

Investors said the boost was a signal of confidence from Yum management.

"It shows that they believe the economic haze is clearing," said Michael Yoshikami, chief executive and founder of YCMNET Advisors, which owns shares in Yum rival McDonald's.

China, the world's fastest growing major economy, is Yum's biggest profit driver and accounts for just over 40 percent of overall profits.

Yum, which also owns the Pizza Hut and Taco Bell brands, is widely regarded as one of the biggest China plays for investors in the U.S. stock market. (Graphic of Yum's stock performance: r.reuters.com/kek62s)

Closely watched sales at Yum's established restaurants in China rose 18 percent in the second quarter. That increase came as higher wage and commodity costs caused the company's China restaurant margins to fall 0.5 basis points to 19.7 percent.

Sales at established restaurants in Yum Restaurants International (YRI) were up 2 percent for the quarter. The YRI division includes Yum's other non-U.S. markets such as France, India and Russia.

"China is just an awesome growth engine. YRI is another and that's accelerating," said Tucker Brown, a research principal at Sustainable Growth Advisors, which holds Yum in its SGA Global Growth Fund.

Yum's overseas strength offset a 4 percent decline in U.S. same-store sales.

The United States is Yum's most challenging market and during the second quarter that ended June 11 same-store sales fell 5 percent at Taco Bell, 2 percent at Pizza Hut and 5 percent at Kentucky Fried Chicken.

The company, which is still feeling the effects of a quickly dropped lawsuit over the contents of Taco Bell's ground beef, expects U.S. profit performance to improve by the fourth quarter.

"For the full year, we expect strong performance from both China and YRI as well as the benefit from foreign currency translation to overcome a challenging year" in the United States, Chief Executive David Novak said in a statement.

Rising food costs are an ongoing issue for restaurants and Yum said it expects higher inflation than previously thought in China and the United States.

Yum now sees China commodity inflation of about 9 percent for the full year, versus about 7 percent previously.

It also ticked up its U.S. inflation forecast to about 7 percent for the full year, versus 6 percent previously.

Yum's second-quarter net income rose to $316 million, or 65 cents per share, from $286 million, or 59 cents per share, a year earlier.

Excluding special items, profit was 66 cents per share, beating analysts' average estimate by 5 cents per share, according to Thomson Reuters I/B/E/S.

Revenue rose to $2.8 billion from $2.6 billion a year earlier.

Shares in Yum closed up 1.1 percent at $55.58 on the New York Stock Exchange after data showed that China's economy grew faster than expected in the second quarter. That report eased fears of a hard landing and strengthened Beijing's resolve to fight persistently high inflation.

Company shares continued their climb following Yum's after-hours earnings report, ending at $56.82 in extended trading.

(Reporting by Lisa Baertlein; Editing by Richard Chang, Carol Bishopric, Phil Berlowitz)