Is Yum! Brands, Inc. China Business Crisis Finally Coming to an End?

China Division reported a 3% growth in system sales thanks to KFC.

Is Yum! Brands, Inc. China Business Crisis Finally Coming to an End?

By: Abdullah Saeed Qureshi Published:
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China Division reported a 3% growth in system sales thanks to KFC

Yum! Brands Inc (NYSE:YUM) released its second quarter of fiscal year 2016 (2QFY16) earnings results on Wednesday during after-market hours. The company raised its full year estimates for core-operating profit growth to 14% from12%.

Yum! Brands stock went up 3.06% to $88.36 during pre-market hours trading on Thursday at the New York Stock Exchange (NYSE).

The Louisville, KY based restaurant operator highlighted that it delivered core operating profit growth of 7% in the second quarter. Yum reported a net profit of $339 million, up significantly from $235 million reported in the same period last year. Earnings per Share (EPS) for the quarter came in at $0.81, representing a 54% increase year-over-year (YoY).

Yum’s China business, which contributes to more than half of company’s revenue, also reported a 3% increase in its system sales (excluding foreign currency translation). Yum also announced that it is on track to finalize the date for the spinoff of its China business, which is expected to be around October 31, 2016.

Yum’s China division also saw the opening of 72 new units during the quarter and witnessed a 6% increase in the core operating profit. However, same store sales for its China division remained even. In total, Yum opened 373 new restaurants worldwide, of which 72% of international development came from emerging markets including China. Yum’s system sales worldwide also reported a 3% increase, however, same store sales worldwide remained even.

Greg Creed, CEO of Yum! Brands said regarding China results: “Given our strong first-half results and current trends in China, I’m pleased to raise our full-year core operating profit growth forecast. I’m particularly pleased with the continued sales momentum at KFC China, which delivered better-than-expected same-store sales growth of 3%.”

Though the company’s KFC division reported a significant uplift, its Pizza Hut division, which contributes to about one-quarter of the company’s operating profit in China, remains a major concern. Same store sales at Pizza Hut Casual Dining declined by 11%. However, the company said that Pizza Hut sales improved compared to last year, reporting a 1% YoY increase, and a 7% growth in core operating profit.

Mr. Creed said: “This represents our fourth-consecutive quarter of positive same-store sales growth at KFC China despite the second quarter being our most difficult of the year from a historical sales overlap standpoint. Importantly, our China Division is off to a good start in the third quarter for both KFC and Pizza Hut Casual Dining, including a return to positive same-store sales at Pizza Hut Casual Dining in recent weeks.”

Additionally, franchise and license revenue from its China division also reported a 7% increase and restaurant margin also went up by 1.1% in the second quarter.

Mr. Creed also highlighted that Yum, which is bound to return about $6.2 billion to its stakeholders before its China spinoff, is on track and would likely be able to fulfill its promise. The company said in a statement: “Since we announced our intention to separate the China business, we have repurchased approximately $3.3 billion of shares at an average price of $76, reducing our share count by 42.9 million shares.” This is part of the company’s previously announced plan to give its stakeholders the promised $6.2 billion related to its China business spinoff.

Following the earnings results, Mr. Creed also highlighted that 2016 is a transformational year for the company as it trying its best to finalize the deal for its China business, which has caused serious worries for the US based restaurants operator in the past. However, the company’s China business has recently bounced back significantly.

Back in January, CBN reported that Yum’s China division has been facing a major downfall amid stiff competition in the market and food safety issues. Though the company’s management did its best to ignite sales for the brand’s products but nothing seemed to work for the company.

Mr. Creed indicated that Yum’s China team is “applying best global practices, fresh thinking and new insights to revitalize the brand and achieve attraction with consumers in the mainland.” He further added that Yum’s China team members have a variety of new strategies and concepts. However, in May 2016, news erupted that Yum is falling short of partners for its China business. The company has been trying to find partners and according to sources, it is very close in doing so.

Mr. Creed said: “We’re confident in our plans to drive second-half sales improvement led by a continued focus on innovation, value and our core products.”