Yum! Brands Feeds on China Strength

LOUISVILLE, Ky. ( TheStreet) -- Yum! Brands ( YUM) beat Wall Street expectations for its second-quarter results Wednesday on strong sales growth in China.

Yum!, the operator of Taco Bell, KFC and Pizza Hut restaurant chains, said same-store sales -- or sales at stores open at least one year, a closely watched metric in the restaurant industry -- grew 18% in China but fell 4% in the U.S. Analysts had expected the key line item to grow 11% in China and to fall 1.6% in the U.S.

Yum!'s stock traded heavily ahead of its report. Nearly 5.3 million shares changed hands in Wednesday's session, compared with their average daily volume of just 3.5 million. The stock closed higher by 1.1% at $55.58, and gained another 3.4% in after-hours trading.


After-hours gains also came as a result of Yum! lifting its full-year profit growth forecast "to at least 12% based on the continued strength of our international businesses," CEO David C. Novak said. That would translate to earnings of at least $2.83 a share, excluding items, for the year. That's in line with the current average analysts' view, according to Thomson Reuters data.

Yum! booked a 10.5% jump in second-quarter earnings to $316 million, or 65 cents per share, compared with year-earlier earnings of $286 million, or 59 cents a share. Total revenue rose 9.7% to $2.82 billion from $2.57 billion a year ago.


Analysts were expecting Yum! to earn $293.3 million, or 61 cents per share, on revenue of $2.7 billion.

Earlier this month, analysts at Goldman Sachs downgraded Yum! shares to sell, citing uncertainty in the restaurant company's China market, as well as weakness with Taco Bell.

"Given Chinaâ¿¿s current monetary tightening cycle and historical correlations, we believe YUMâ¿¿s China same-store sales may decelerate in the back half of the year," the analysts noted, adding that the recent fallout over Taco Bell's beef lawsuit continues to linger in Americans' minds.


In an effort to draw more customers, Taco Bell said earlier this month it will offer free Wi-Fi at all of its U.S. restaurants by 2015 in a move that echoes that of restaurant giants McDonald's ( MCD) and Starbucks ( SBUX). Just 40 Taco Bell restaurants offer the complimentary service now.

The fast-food chain will also outfit its stores with TV screens airing programs from Restaurant Entertainment Network, a content providing service already employed by Denny's ( DENN), Arby's, Wendy's ( WEN), Carl's Jr and Hardee's, according to a report in The Independent. Programs will feature content on music, lifestyle, entertainment and sports.


Deutsche Bank analysts had a hold rating on Yum! shares, and said it expects comps to fall around 1.3% in the U.S., with steeper drops at Taco Bell following the now-dropped lawsuit.

The firm expected comps in China to rise 9% in the quarter but "even with very strong comps, we are expecting high food and labor inflation to continue to weigh on China margins."

-- Written by Miriam Marcus Reimer in New York.

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