Yum! Brands (NYSE:YUM), parent of Taco Bell, KFC, and Pizza Hut, announced first-quarter results that show it's back on track and expanding in China, while its U.S. market continues to grow steadily.
For the quarter, profits jumped 11% to $170 million, or $0.59 per share, as increased margins lifted earnings above expectations. Revenues inched up 2% to $2.09 billion, which was in line with expectations.
In China, its fastest-growing market, Yum! Brands recovered from its dismal fourth-quarter performance when a combination of factors contributed to a 20% decrease in its operating profit. The company was forced to battle the triple whammy of an avian flu outbreak, reports of a vegetable ingredient that could cause liver damage, and foods that contained the carcinogenic coloring Sudan-1. That's an awful lot for any company to contend with (it's estimated that the avian flu scare alone led to temporary sales decreases as high as 60%), but Yum! Brands fought through to get back on track. In the first quarter, its China division reported operating profits of $58 million, up 10% from last year. Concerns about the bird flu have clearly waned, as demonstrated by the 35% and 25% sales increase in February and March at its KFC locations.
Same-store sales growth in China wasn't as impressive, declining 3%. However, Yum! Brands decided that the best way to counter that decrease was to open a plethora of new locations. The company opened 63 new locations in the market, making the quarter a huge success. It's going to have to continue expanding rapidly in the region if it expects to have any hopes of staving off McDonald's (NYSE:MCD), which continues its aggressive expansion into China.
The company was also boosted by its strong showing in the U.S. Operating profit was up 19% to $188 million. And, unlike in China, Yum! Brands increased its same-store sales in the U.S.; Taco Bell and KFC overcame Pizza Hut's 1% decline with 8% and 5% growth, respectively.
Feeling good about its performance, Yum! Brands increased its full-year earnings outlook from $2.79 per share to at least $2.81 per share. That would represent 10.6% growth from last year and is in line with expectations.
My one concern with Yum! Brands is the possibility of an avian flu outbreak in the U.S. Despite the company's efforts to ensure its products are safe, sales would no doubt be affected if an outbreak hit. However, much like in China, I would expect any negativity to be temporary and would consider any drop in its stock price a buying opportunity.
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Fool contributor Mike Cianciolo doesn't own shares of any company in this article.
