Yum Brands Inc.'s stock surged Thursday as the operator of Taco Bell, Pizza Hut and KFC laid out ambitious plans for overseas expansion and offered an upbeat outlook for its U.S. business despite a sluggish first quarter.
The company reported Wednesday that its first-quarter profit fell 14 percent despite continued strong performance in China, where the fast-food operator opened 98 restaurants in the period. The results beat profit projections from analysts polled by Thomson Reuters.
In the United States, Yum overcame weak dinner sales at KFC and Pizza Hut — partly through cost-cutting and because commodity inflation eased — to post a 7 percent rise in operating profit.
"This is a slug-it-out year clearly," Yum Chairman and Chief Executive David C. Novak said in a conference call with industry analysts Thursday. "We're not happy with what's going on with our dinner business, which is Pizza Hut and KFC primarily. But I am very happy with the actions that we're taking to build these brands and make them more broadly appealing."
The company stuck to its prediction of 10 percent earnings-per-share growth for the year.
Yum's stock was up $2.38, or 7.4 percent, at $34.47 in afternoon trading.
Novak said Yum's business in China, where the company has just over 3,100 restaurants and where KFC has become a dominant brand, will continue to grow, with 1,500 more restaurants opening there in the next three years.
"Yum is doing its part to stimulate the Chinese economy," he said.
Yum's chief financial officer, Rick Carucci said new restaurant openings in China are projected to yield high returns of about 30 percent.
"Trust me, as long as we continue to expect this type of return, we'll continue to rapidly expand in China," he said.
Larry Miller, a restaurant analyst with RBC Capital Markets, said the strategy makes sense.
"If I were them, I would be investing in that market, too," he said. "It's hard to say no to a billion Chinese consumers."
In its international division, which excludes China, Yum opened 145 restaurants in the quarter. Novak said aggressive expansion will continue there too and cited India as a key emerging market.
KFC's first-quarter sales growth exceeded 30 percent in its restaurants open at least a year in India, he said. Also, Yum plans to introduce Taco Bell there later in the year, he said.
"They're going for the emerging market growth, and they're going at it in a big way," Miller said in an interview. "They still have a lot of faith in kind of the pre-global meltdown economy; that things are going to look the same when we come out of it."
Yum predicted that its current quarter will be its "low point" for the year.
In the recession-weary U.S., value remains a key attraction for customers, and Novak acknowledged that presents "a challenge for us."
Pizza Hut is promoting its PANormous pizza offering for $10, and last year rolled out Pizza Mia as a permanent value offering. Novak said the brand is right strategically to expand its menu to include pastas. Yum also is expanding a side concept offered in some Pizza Huts, called WingStreet, that sells chicken wings.
Novak said KFC underperformed in the quarter as dinner sales slumped. He said the chicken chain's recently introduced value menu "improved our transactions, but we didn't get the overall sales lift that we would have liked" because of weaker dinner sales.
KFC is pinning hopes for a sales rebound on its recently introduced Kentucky Grilled Chicken, which the chain hopes will appeal to health-conscious customers looking for a nonfried option.
Taco Bell, which generates 60 percent of Yum's U.S. profits, remains a strong performer, though it's feeling pressure from value offerings by more competitors, the company said.
Still, Novak said he was pleased with the direction of the U.S. business.
"We expect each one of our brands to go into 2010 stronger," he said.
Miller said he expects Yum's U.S. business to be "modestly better" in six months.
The company's brands also include Long John Silver's and A&W All-American Food.