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Yum! Brands Rules the Roost in China Once More

Having taken flight for the better part of a year, customers are finally flocking back to Yum! Brands' (NYSE: YUM  ) most important division, its KFC chicken chain in China. The restaurant operator's first-quarter earnings indicate the series of health scandals and avian flu outbreaks are finally behind it, but signs of weakness elsewhere show there's more still to do.

China accounts for 50% of Yum! Brands' $2.7 billion in revenues, and performance this quarter was driven by an 11% surge in same-stores sales at KFC as customers returned in droves to the chain (Pizza Hut comps were up 8%). After seeing comps tumble 13% across all of China in 2013, Yum! began luring its KFC customers back to its stores with a half-price promotion in November to remind them why they used to eat at the restaurant in the first place. But let's also remember that Yum! was going up against terrible comparisons in the year-ago period, when same-store sales plunged 24% at KFC, meaning it might have been more surprising if the results didn't look so strong this time around.

Yum! doesn't break out KFC's revenues, but we know the number of stores in the division grew by 5% while its Pizza Hut chain recorded a 23% jump in restaurants, leading to an overall 7% store-count expansion in China. Since systems sales were up 20% year over year (or 17% after removing currency exchange rates), a good portion of the growth is attributable to the franchises just getting back on track. That's not to say it's not a huge improvement from where it was even in the fourth quarter of last year when things first turned for the better, but it was starting from a very low base.

KFC and Pizza Hut in India. Source: Yum! Brands.

Looking at India, Yum! Brands' other long-term growth division, we see it's still a work in progress as division sales were up 21% before currency effects, but only because it opened 25% more stores in the quarter. Comps were still down 1% and its operating profits declined by $1 million. After more than 10 years in India, it now has more than 700 stores open, still a fraction of the 6,300 or so it has in China, but having identified the country as a place for driving substantial future growth, Yum! still has a ways to go to prove itself there.

Not to mention what it needs to do here at home as well. KFC accounts for a quarter of system sales and they fell 4% from last year while U.S. Pizza Hut system sales represent 55% of the total and they were down 3%. Taco Bell, which gained a lot of favorable publicity for its new Waffle Taco offering as it began a targeted campaign into the breakfast daypart, saw comps fall 1% even as the number of restaurants open widened by a similar amount.

Because China is so important to Yum! Brands, investors can be reasonably assured that its performance this quarter means it has returned to health for good. That allows it to concentrate on the other portions of its business, which, while not nearly in the same condition as its Middle Kingdom division had been, are still in need of attention to ensure its customers don't fly the coop once more.

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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9/2/2015 4:07 PM
YUM $80.27 Up +1.17 +1.48%
Yum! Brands CAPS Rating: ****