UPDATE 1-KFC parent Yum plans more China price rises in 2012

Tue Feb 7, 2012 12:33pm EST

* China price rises will offset food, labor inflation

* Price rises also planned for U.S., overseas markets

* Taco Bell saw no impact from U.S. salmonella outbreak

* Shares up nearly 2.5 percent

By Lisa Baertlein

Feb 7 (Reuters) - KFC parent Yum Brands Inc plans to raise prices in China in 2012 to help offset higher food and labor costs and boost profitability in its most important market, Chief Financial Officer Rick Carucci said on Tuesday.

The move would come on top of price increases in China in 2011. Those increases helped the company post an unexpectedly strong 21 percent gain in same-restaurant sales in the fourth quarter.

Investors cheered the sales figure because it quelled fears that slowing growth in China would hurt results in the market that accounts for the lion's share of Yum's sales and profit.

Yum shares, which are trading near all-time highs, were up nearly 2.5 percent at $64.75 in midday trading on the New York Stock Exchange.

Carucci expects same-restaurant sales to moderate from the 19 percent gain booked in 2011, in large part because the hurdle for year-over-year gains will be higher.

As expected, cost pressures dragged fourth-quarter China restaurant margins down to 15.8 percent from 18.2 percent a year earlier.

Yum wants to bring margins up to around 20 percent for all of 2012 and plans to use higher prices to offset inflation in food prices, labor costs and other items.

"We expect to make progress closing the gap between inflation and our menu pricing, and to see positive year-over-year restaurant margins in the second half of 2012," he said.

Yum also plans to bolster growth by adding another 600 restaurants in China, where its brands include KFC, Pizza Hut, East Dawning and Little Sheep. The additions would bring Yum's restaurant count to about 5,100.

The company's 2012 international expansion plans also call for 800 new restaurants in its Yum Restaurants International (YRI) division, which includes Europe and Africa, and another 100 in India.

Modest price increases also will be on the menu in the United States and other international markets early next year, Carucci said.

While Yum's operations in China and other developing countries have made it a top pick for international investors, the company's U.S. division has underperformed.

The domestic division made some progress in the fourth-quarter, when Yum's overall sales at U.S. restaurants open at least one year rose 1 percent. Unexpectedly strong results at Pizza Hut offset declines at Taco Bell and KFC.

Sales trends at Taco Bell, the leading U.S. Mexican fast-food chain, turned positive late in the fourth quarter and have continued upward, Yum Chief Executive David Novak told analysts.

A salmonella outbreak in late 2011 - Taco Bell's second in two years - had no impact on sales or transactions, Novak said. Taco Bell's link to the latest outbreak, which started in October, was revealed just last week and many consumers were unaware of the chain's link to the outbreak.

The 50-year-old Taco Bell chain has been working to revive sales, which went stale in 2011 after a lawsuit challenged the quality of its ground beef. That lawsuit was thrown out by the court, but the damage to the company's reputation was done.

Novak said Taco Bell results should get a 2012 bump from the phased roll-out of breakfast and the national debut of Doritos Locos Tacos in March.

"We are very bullish that we are going to be able to have an outstanding year, or at least a solid year this year. You pick your adjective, but it is going to be a lot better than last year," Novak said, referring to Taco Bell.

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