Yum Brands’ quarterly profit jumps 35 percent

/ Source: The Associated Press

Grilling has put some sizzle back at KFC, but a reduced sales outlook took a toll on shares of KFC parent company Yum Brands Inc. despite a strong second quarter.

The spring rollout of Kentucky Grilled Chicken, backed by an advertising blitz and a promotion on Oprah Winfrey's Web site that inspired a run on stores, led to surging U.S. sales at the chicken chain. That helped the operator of KFC, Pizza Hut and Taco Bell post a 35 percent increase in second-quarter profit.

But the company downgraded its full-year sales outlook for its China and U.S. operations. Same-store sales in China are expected to be about flat for the year, compared with Yum's prediction in December of 5 percent growth.

U.S. same-store sales are expected to be down slightly, compared with a December projection of 3 percent growth. Its international division, which excludes China, now expects same-store sales growth of about 3 percent, compared with a 3 to 5 percent projection in December.

The company maintained its earnings outlook for the full year below analyst expectations, and investors sent shares down $1.63, or 4.5 percent, to $34.60 in after-hours trading.

Yum on Tuesday reported a 35 percent increase in profit for the three months ending June 13 due to strong operating profit in China and the U.S. and an improved tax rate.

In the U.S., Yum's operating profit rose by 8 percent in the three months ending June 13, as strong sales at KFC and Taco Bell offset sluggishness at Pizza Hut. Yum said domestic same-store sales slipped 1 percent in the quarter, due to an 8 percent decline at Pizza Hut.

The company attributed KFC's rejuvenated sales to grilled chicken — which had one of the most successful launches in Yum's history, said Yum spokesman Jonathan Blum. He credited the new grilled product for a 10-point swing in same-store sales from the first quarter to second quarter for the chain best known for fried chicken.

"It overcomes KFC's number one barrier to growth, which was health," he said.

Grilled chicken already represents more than 40 percent of on-the-bone chicken sales at KFC stores in the U.S., he said..

When coupons for free grilled-chicken meals were posted on Oprah.com, the resulting rush lasted days and snarled service in some stores — and traffic on nearby roads. The frenzy briefly overwhelmed the chain and angered some customers who were offered rain checks.

Yum Chairman and CEO David C. Novak said Tuesday that Pizza Hut remains the company's biggest challenge in the U.S. as it competes "in a more discretionary, higher guest-check, dinner category." But Novak expressed confidence in Pizza Hut's strategy of broadening its menu to include pasta and chicken wings.

Yum reported net income of $303 million, or 63 cents per share, for the quarter, compared with $224 million, or 45 cents per share, in the same quarter last year.

Revenue fell roughly 7 percent to $2.5 billion.

Adjusted for special items, the company earned 50 cents per share. Analysts polled by Thomson Reuters, on average, expected Yum to earn 43 cents per share on revenue of $2.5 billion.

The quarterly earnings benefited from a one-time gain of $68 million from Yum acquiring additional ownership in the entity that owns the KFC business in Shanghai, China.

Operating profit in Yum's pivotal China division rose 14 percent to $105 million in the quarter, as the opening of 118 restaurants helped offset a 4 percent drop in same-store sales from a robust period a year ago.

The company maintained its guidance for the year, saying it expects to earn $2.10 per share for the year — 10 percent growth over the prior year. Analysts expect $2.12 per share for the year.

The company is on pace for 475 new restaurant openings in mainland China this year, consistent with last year's rapid pace, Blum said.

Yum said its international division, which doesn't include China, opened 193 new restaurants in more than 50 countries in the quarter.

The company's brands also include Long John Silver's and A&W All-American Food.