Yum! Brands (NYSE: YUM) jumped 7.6% on Wednesday after the world’s largest restaurant operator reported better-than-expected earnings.
In the company’s third quarter, which ended September 8, 2012, its profits jumped 23%, to $471 million, or $1.00 a share, from $383 million, or $0.80, in the third quarter of 2011. Without unusual items, the company earned $0.99 a share, up 19.3% from $0.83. That topped the consensus estimate of $0.97. Sales rose 9%, to $3.6 billion.
Due to the strong results, Yum! Brands raised its full-year outlook. It now forecasts earnings of $3.24 a share, up from its previous forecast of $3.22.
The company operates over 37,000 restaurants in 117 countries worldwide under the Taco Bell, Pizza Hut and KFC banners. Yum continues to increase its already vast international presence: in the third quarter, markets outside the U.S. accounted for 78% of its sales, up from 74.5% in the second quarter.
Yum! Brands Is Defying Gravity in China
The company’s China division, which accounted for 56% of its sales in the latest quarter, posted a 22% sales increase. That was largely the result of the company’s ongoing rapid expansion in the country: Yum! Brands opened its 4,000th KFC outlet in China in the quarter, and has plans to open 750 new restaurants in the country this year.
But even if you exclude the contribution from new restaurants, the company’s Chinese growth still looks impressive. Same-store sales, which track sales at outlets open for one year or more, rose 6%. That compares to a 2% gain in the rest of the world. Same-restaurant sales also rose 6% in the U.S., thanks to strong gains from the company’s Taco Bell chain, partly due to the popularity of its Doritos Locos Tacos.
The strong results come as China’s economy continues to slow. In the latest quarter, the country posted an economic growth rate of 7.6%, which is still very strong by developed country standards, but it’s well below the 9.2% growth the country posted in 2011 and a far cry from 2010’s 10.4% rate.
Even so, Yum! Brands remains upbeat about its Chinese prospects:
“Our China business is having another strong year,” said Yum Chairman and CEO David C. Novak in a recent Bloomberg Businessweek article. “But as I’ve said before, China is going to have its inevitable ups and downs … We now face a slowing economy. But that doesn’t change our long-term outlook in China one iota. Our annual performance has been pretty consistent, and I expect this to continue.”
Yum! Brands Is Looking to India for Its Next Big Growth Spurt
Now the company is looking to another emerging market, India, for future growth. Yum! Brands remains in a good position to capitalize on the country’s rapidly growing middle class. This is a market with huge potential: according to research firm RNCOS, the fast-food industry is expected to post a combined annual growth rate of 34% in India from 2011 to 2014.
Yum’s India division continues to grow strongly. In the latest quarter, its sales jumped 29%, matching the 29% increase in the number of stores it operates there. But the sales gain wasn’t just the result of opening new restaurants: same-restaurant sales jumped 5% in India during the quarter, trailing China and the U.S., but ahead of the company’s restaurants in the rest of the world.
The company recently broke its Indian restaurants out as a separate division. Before, it reported their results as part of its Yum Restaurants International (YRI) division, which encompasses the entire world apart from the U.S. and China. The Indian business’s revenue of $25 million only accounted for 0.70% of Yum’s overall revenue, but that was up from $24 million, or 0.76%, in the previous quarter.
Swift Overseas Growth Has Risks, But Yum Is a Seasoned Pro
Yum does face some risks in India, however. For one, the country does not have a long tradition of dining out, with most Indians still preferring to eat at home. In addition, the company’s deep and growing reliance on overseas sales makes it vulnerable to fluctuating currency exchange rates. Yum also faces rising competition from McDonald’s, Domino’s and other fast-food chains that are aggressively expanding in emerging markets.
However, Yum’s long overseas experience helps mitigate some of that risk. The company was the first fast-food chain to enter China, in 1987, so it knows how to navigate the tricky terrain of building and growing a profitable business in a market that is completely different from the U.S.
Like Indians, Chinese tend to dine in more than citizens of Western countries. But Yum has learned to increase its appeal by adapting its menus to local tastes. It’s taking the same approach in India, adding items like Tandoori Paneer Pizza and more vegetarian items, like Veg Strips, to appeal to the large number of Indians who don’t eat meat. Its strong same-store sales growth in India attests to its success in this area.
Meanwhile, Yum’s Indian expansion is proceeding at full speed. The company recently said it will spend $100 million to grow in the country in the next four to five years, with the goal of expanding the number of outlets in India and surrounding nations to 1,000 by 2015.
“India is at the same point China was before it took off, in terms of macroeconomic parameters such as per capita income and export as a percentage of GDP,” Niren Chaudhary, president of Yum’s India division, recently told Reuters. “We’re an economy driven on the back of domestic consumption expenditure and therefore, as we have seen, we are likely to continue to be resilient even in the face of a global slowdown.”
What do you think of this article? Please post your feedback in the “comments” section below!
Leave a Reply
Our comments section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a personal question about your subscription or need technical help, please contact our customer service team. Thank you.
You must be logged in to post a comment OR register below.