UPDATE 2-Yum China disappoints as Chinese growth cools

Wed Apr 18, 2012 6:11pm EDT

* Q1 EPS excluding items $0.76 vs Street view $0.73

* Same-restaurant sales rise 14 percent in China

* Sees more China price increases to offset inflation

* India same-restaurant sales up 8 percent

* Shares down almost 1 percent in extended trading

By Lisa Baertlein

April 18 (Reuters) - KFC parent Yum Brands Inc's first-quarter restaurant sales in China slightly missed analysts' lofty expectations for the market that accounts for more than 40 percent of the company's profits.

Expectations were high going into the quarter despite a slight cooling in economic growth in China, which accounts for just over 40 percent of Yum's overall profits.

Yum for the first time reported its results from India as a stand-alone unit. The company's more than 400 outlets there saw same store-sales rise 8 percent.

Investors have been jittery about a potential slowdown and hard landing in China -- the world's fastest-growing major economy -- where first-quarter gross domestic product growth slowed to 8.1 percent, the most lackluster increase in nearly three years.

Yum's 14 percent first-quarter same-restaurant sales gain in China was strong, on top of a 13 percent rise a year earlier, but fell short of analysts' average call for a rise of 14.6 percent, according to Consensus Metrix.

Chinese restaurant margins decreased 1.5 percentage points to 23.6 percent, hurt by wage and commodity inflation.

Yum spokesman Jonathan Blum told Reuters that Yum would continue to raise menu prices this year to offset that pressure. But he underscored that the increases would be at a rate lower than inflation so as not to become too expensive.

Yum, which is widely seen as a way for U.S. investors to bet on China, has more than 3,800 KFC restaurants and almost 700 Pizza Hut outlets in China.

The company, which beat Western restaurant rivals to China and still outpaces them in the market, expects China's middle class to grow from about 300 million people today to 600 million in a decade.

The company, based in Louisville, Kentucky, also had upbeat news on the home front, where its results have lagged.

Same-restaurant sales from the United States were up 5 percent, boosted by brisk sales of Taco Bell's new Doritos Locos Tacos. Analysts had expected a rise of 2.2 percent.

Results from Yum Restaurants International (YRI), which includes Japan, Russia and France, also gained 5 percent, better than analysts' call for a 2.8 percent rise.

Yum's net income for the first quarter, ended March 24, rose to $458 million, or 96 cents per share, compared with $264 million, or 54 cents per share, a year earlier.

Excluding special items, Yum earned 76 cents per share in the latest quarter, topping analysts' average target by 3 cents per share, according to Thomson Reuters I/B/E/S.

Citing the better-than-expected first-quarter results, Yum raised its 2012 forecast to expectations for earnings per share growth of at least 12 percent, excluding special items. It had previously expected growth of at least 10 percent.

Shares in Yum, which have gained 45 percent over the last 12 months, slipped 0.9 percent to $72.25 in extended trading.

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