Officials for Yum! Brands Inc. remained upbeat about the quick-service giant’s near- and long-term prospects for profit and new-unit expansion even as it had to manage through significant headwinds during the Sept. 8-ended third quarter.
Traffic slowed in China and a calendar shift cut into sales in the company’s emerging markets, but new-unit growth will accelerate in China and other regions as Yum remains confident in its business models and track record of profitability, executives said.
Improving margins and buoyant same-store sales in the United States for its Taco Bell, Pizza Hut and KFC brands also had Yum officials optimistic for continued profit growth.
Capitalizing on China
Despite traffic falling 1 percent in China in the third quarter, Yum still managed to grow same-store sales in that 4,000-unit market by 6 percent. Chief executive David Novak noted the division faced difficult comparisons from a year earlier of 19-percent same-store sales growth and 27-percent traffic growth.
While the Chinese economy is growing slower than the torrential pace of the past decade, Yum’s long-term outlook is not changing “one iota,” he said.
“The big news is old news, frankly: We’re able to capitalize on China more than any company in the world,” Novak said. “We’ll have our ups and downs, but I’ll always be glad to wake up every day and know we have the position we have in China.”
In fact, Yum said it is on pace to open more than 750 restaurants in China this year, marking the company’s second acceleration from its earlier guidance of 600 openings for 2012. At least 150 of those new restaurants would be Pizza Hut Casual Dining, which is about to make its first significant push into China’s interior.
“Given our new-unit development, we’ll be less reliant on same-store sales growth [in future years] to achieve our targets of 15-percent profit growth,” chief financial officer Pat Grismer said.
But Novak said Yum would not grow faster than its profitability or personnel would allow, citing the conservative tack Pizza Hut Casual Dining took in China several years ago as an example. Profitability had slowed at Pizza Hut, so rather than forge ahead into Tier-3 through Tier-5 cities, the brand halted expansion and turned toward menu development, adding new products and a value menu.
“The transactions and profits went through the roof, and then we expanded,” he said. “We’re confident we’re growing the business the right way. We went into this year with a projection of 600 openings. Why? Because you don’t grow faster than you need to. We’re not trying to be heroes; we’re trying to build a heroic business.”
Building momentum in the U.S.
Yum would look to continue the supply chain efficiencies and same-store sales leverage that led to a 4.6-percent improvement in restaurant-level margins in the third quarter, officials said. Third-quarter same-store sales rose 7 percent at Taco Bell, 6 percent at Pizza Hut and 4 percent at KFC, the company reported.
Yum president Rick Carucci called Taco Bell the catalyst of Yum’s resurgent performance in the United States this year, based in large part on the strength of its two big product introductions, Doritos Locos Tacos and Cantina Bell. Those products were 7 percent and 5 percent, respectively, of Taco Bell’s sales mix in the quarter.