Yum says equipped to navigate China's "ups and downs"

Wed Oct 10, 2012 11:38am EDT

A man walks past a McDonald's outlet in Beijing April 2, 2007. REUTERS/Claro Cortes IV

A man walks past a McDonald's outlet in Beijing April 2, 2007.

Credit: Reuters/Claro Cortes IV

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(Reuters) - Yum Brands Inc (YUM.N) expects to continue delivering consistent performance in China - its biggest market for sales and operating profit - despite economic uncertainty there, the restaurant company's chief executive said on Wednesday.

Shares in the parent of the KFC, Taco Bell and Pizza Hut chains jumped nearly 10 percent the morning after the company raised its full-year profit forecast due to better-than-expected third-quarter earnings that were driven by solid results from China and the United States.

Louisville, Kentucky-based Yum is the biggest Western restaurant operator in China, with more than 4,000 KFC shops and almost 740 Pizza Hut restaurants. Yum's stock is widely viewed as a way for U.S. investors to bet on what is still the world's fastest-growing major economy.

"China is going to have its inevitable ups and downs," David Novak, Yum's chairman and CEO, told analysts on a conference call Wednesday.

"Our annual performance has been pretty consistent and I expect this to continue," he said.

Yum's KFC is the leading Western restaurant brand in the country, appealing to its aspirational and rapidly expanding middle class.

Yum also operates Little Sheep hot pot restaurants in China, the market that accounted for more than half of total company revenue and operating profit in the third quarter.

Its development plans call for the opening of two restaurants per day in China.

Yum's sales at established restaurants in the country rose 6 percent for the quarter, matching the gain analysts expected and resisting a slowdown that has dented demand at European and U.S. companies ranging from Burberry Group Plc (BRBY.L) and Hugo Boss AG (BOSSn.DE) to Tiffany & Co (TIF.N) and Levi Strauss & Co.

During the third quarter, Yum's China restaurant margin increased 0.1 percentage point to 21.4 percent, even as wage rates spiked 8 percent and commodity prices increased 2 percent.

Those sales and margin results defied market fears and offered strong evidence of Yum's pricing power in China, Bernstein Research analyst Sara Senatore wrote in a client note.

Continued margin improvement and robust new unit development should help Yum deliver double-digit profit growth for China in the fourth quarter, Chief Financial Officer Patrick Grismer said on the call.

However, the "volatile and slowing economy" in China makes it difficult to forecast key sales at established restaurants.

"At this point, our best estimate is that China same-store sales will be low single digits to flat" in the fourth quarter, Grismer said.

Yum shares were up 9.5 percent at $71.95 at midmorning on Wednesday on the New York Stock Exchange.

(Reporting by Lisa Baertlein in Los Angeles; editing by Matthew Lewis)

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