Yum! Brands reports Q1 net earnings of US$399M, up 18.4% from year-ago period as revenue rises 7.5% to US$2.72B

Nevin Barich

LOUISVILLE, Kentucky , April 22, 2014 (press release) – Yum! Brands, Inc. (NYSE: YUM) today reported results for the first quarter ended March 22, 2014, including EPS of $0.87.

Beginning this quarter, our financial reporting will reflect our new structure with comparable prior periods adjusted accordingly. Effective the beginning of 2014, we combined our Yum! Restaurants International and U.S. divisions into three global brand divisions: KFC, Pizza Hut and Taco Bell. China and India remain separate divisions given their strategic importance and enormous growth potential. This new structure is designed to drive greater global brand focus, enabling more effective know-how sharing and accelerated growth.

FIRST-QUARTER HIGHLIGHTS

Worldwide system sales grew 4%. Worldwide restaurant margin increased 3.3 percentage points to 19.2% and worldwide operating profit increased 22%. 

Total international development was 249 new restaurants; 86% of this development occurred in emerging markets.

China Division system sales increased 17%, driven by 7% unit growth and 9% same-store sales growth. Restaurant margin increased 6.8 percentage points to 23.4%. Operating profit increased 80%.

KFC Division system sales increased 4%, driven by 2% unit growth and 1% same-store sales growth. Restaurant margin decreased 0.3 percentage points to 12.9%. Operating profit increased 4%.

Pizza Hut Division system sales were even, as 2% unit growth was offset by a 2% same-store sales decline. Restaurant margin decreased 4.2 percentage points to 10.8%. Operating profit decreased 14%.

Taco Bell Division system sales were even, as 1% unit growth was offset by a 1% same-store sales decline. Restaurant margin decreased 2.6 percentage points to 15.6%. Operating profit decreased 16%.

India Division system sales increased 21%, driven by 25% unit growth which was partially offset by a 1% same-store sales decline. Operating profit declined $1 million.

Worldwide effective tax rate, prior to Special Items, decreased to 25.8% from 26.0%.

Foreign currency translation negatively impacted operating profit by $3 million.

DAVID NOVAK COMMENTS

David C. Novak, Chairman and CEO said, “Yum! Brands is clearly on its way to a strong bounce-back year delivering first-quarter EPS growth of 24%. Operating profit grew 80% in China, prior to foreign currency translation, driven by strong sales and margin growth. Looking ahead, we have significant building blocks in place in China and each of our divisions to drive sales and profit growth this year and beyond.

China Division system sales increased 17% and restaurant margins were 23.4%. Importantly, KFC results continued to improve with an 11% same-store sales increase in the quarter. We are building off this sales momentum and are encouraged by our recent Menu Revamp, which features the simultaneous launch of 15 exciting products. At Pizza Hut Casual Dining, we had strong performance across every measure. Given the strength at both KFC and Pizza Hut, we expect to open at least 700 new restaurants in China this year as we further capitalize on our leading position in the number-one retail opportunity in the world.

Outside of China, we’re on our way to opening a record 1,250 new international units this year. These new units further strengthen our lead in emerging markets where we continue to have positive momentum. We also delivered solid sales and profit performance in Russia and Africa, as well as developed markets like KFC in the U.K. and Australia. However, we experienced disappointing U.S. results, which were impacted by unusually severe weather. We have confidence in our plans to drive balance of year improvement and are particularly pleased with the initial results of our recent Taco Bell breakfast launch.

In summary, Yum! Brands is off to a strong start this year. We expect to achieve EPS growth of at least 20% in 2014 and look forward to re-establishing our track record of consistently delivering double-digit EPS growth in the years ahead.”

CHINA DIVISION

China Division system sales increased 17%, prior to foreign currency translation.

Same-store sales grew 9%, including growth of 11% at KFC and 8% at Pizza Hut Casual Dining.

China Division opened 123 new units in the first quarter.

Restaurant margin increased 6.8 percentage points to 23.4%, driven by sales leverage and restaurant operating efficiencies. Excluding the impact of Little Sheep, restaurant margin would have been 24.0%.

Foreign currency translation positively impacted operating profit by $8 million.

Consistent with prior years, China Division's first quarter includes January and February results only. The first quarter includes Chinese New Year, which is peak season for the China Division.

On April 2, 2014, China Division initiated a comprehensive restage of the KFC brand with the debut of a new menu.

KFC DIVISION

KFC is a new reporting division and includes all KFC results outside of the China and India divisions. For the full year 2013, KFC Division contributed 29% of Yum!'s total operating profit, 91% of which was generated outside the U.S. This division is 91% franchised.

KFC Division system sales increased 4%, excluding foreign currency translation.

International system sales grew 11% in emerging markets and 3% in developed markets. U.S. system sales declined 4%.

International same-store sales grew 3% in emerging markets and 1% in developed markets. U.S. same-store sales declined 3%.

KFC Division opened 77 new international restaurants in 35 countries. This included 59 units in emerging markets.

87% of these new units were opened by franchisees.

Operating profit increased 4%, prior to foreign currency translation. Operating profit was negatively impacted 4 percentage points from a prior year benefit related to a franchise ownership change in Malaysia, which added transfer and renewal fees.

Foreign currency translation negatively impacted operating profit by $10 million.

PIZZA HUT DIVISION

Pizza Hut is a new reporting division and includes all Pizza Hut results outside of the China and India divisions. For the full year 2013, Pizza Hut Division contributed 15% of Yum!'s total operating profit, 54% of which was generated in the U.S. This division is 94% franchised.

Pizza Hut Division system sales were even, excluding foreign currency translation.

International system sales grew 8% in emerging markets and 2% in developed markets. U.S. system sales declined 3%.

International same-store sales grew 3% in emerging markets and 1% in developed markets. U.S. same-store sales declined 5%.

Pizza Hut Division opened 69 new restaurants, including 39 international units and 30 U.S. units. This included 24 units in emerging markets.

87% of these new units were opened by franchisees.

Restaurant margin declined 4.2 percentage points, driven by U.S. sales deleverage and inflation.

Operating profit declined 14%, prior to foreign currency translation. Operating profit was negatively impacted 5 percentage points from a prior year benefit related to changes to a U.K. pension plan.

Foreign currency translation negatively impacted operating profit by $1 million.

TACO BELL DIVISION

Taco Bell is a new reporting division, which includes all Taco Bell results outside of the India division. For the full year 2013, Taco Bell Division contributed 21% of Yum!'s total operating profit, 97% of which was generated in the U.S. This division is 85% franchised.

Taco Bell Division U.S. same-store sales declined 1%.

Taco Bell Division opened 28 new restaurants; 27 of these new units were opened by franchisees.

Restaurant margin declined 2.6 percentage points, driven by promotional activities, inflation and sales deleverage.

Operating profit declined 16%. Operating profit was negatively impacted 5 percentage points from franchise incentives related to the national launch of breakfast.

On March 27, 2014, Taco Bell launched breakfast nationwide.

INDIA DIVISION

India Division system sales increased 21%, prior to foreign currency translation, driven by 25% unit growth. Same-store sales declined 1%.

Operating profit declined $1 million.

Effective the beginning of 2014, results from our 28 franchised stores in Mauritius are no longer included in the India Division and are included in the KFC and Pizza Hut Divisions, as applicable. India unit and system sales growth as shown here exclude Mauritius from the prior year amounts to enhance comparability.

SHARE REPURCHASE UPDATE

Year-to-date through April 21, 2014, we repurchased 2.3 million shares totaling $170 million at an average price of $74.

CONFERENCE CALL

Yum! Brands, Inc. will host a conference call to review the company's financial performance and strategies at 9:15 a.m. Eastern Time Wednesday, April 23, 2014. The number is 877/815-2029 for U.S. callers and 706/645-9271 for international callers.

The call will be available for playback beginning at 12:45 p.m. Eastern Time Wednesday, April 23, through midnight Wednesday, May 21, 2014. To access the playback, dial 855/859-2056 in the United States and 404/537-3406 internationally. The playback pass code is 23852031.

The webcast and the playback can be accessed via the internet by visiting Yum! Brands' Web site, www.yum.com/investors and selecting “Q1 2014 Earnings Conference Call” under “Investment Events.” A podcast will be available within 24 hours.

Industry Intelligence Editor's Note: This press release omits select charts and/or marketing language for editorial clarity. Click here to view the full report.

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