A year of setbacks and shortfalls for Yum!

by Monica Watrous
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A supplier incident in China weighed on fiscal results.

LOUISVILLE, KY. — Last February, the future looked brighter for Yum! Brands, Inc., when company executives forecast earnings per share growth of least 20% for 2014. However, the year did not progress as planned. A highly publicized supplier incident in China — the company’s second in two years — weighed heavily on results, leading to a disappointing 4% increase in earnings per share for the year.

“However, we continue to believe this setback is temporary, as evidenced by the bounce back we delivered in the first half of 2014 following the first supplier incident,” said Greg Creed, chief executive officer, during a Feb. 5 earnings call with financial analysts.

Net income for the year ended Dec. 27, 2014, fell 3.6% to $1,051 million, equal to $2.37 per share on the common stock, which compared with $1,091 million for the prior year. Revenues for the year totaled $13,279 million, up 1.5% from $13,084 million for fiscal 2013.

The company sustained a net loss of $86 million for the fourth quarter, which compared with net income of $321 million in the year-ago period. Fourth-quarter revenues fell 4.4% to $3,997 million from $4,179 million in the comparable quarter.

Executives target earnings per share growth of at least 10% for 2015, as the pace of recovery in China remains slower than expected.

“By no means are we out of the woods, but we are trending in the right direction, and we are continuing to build the brand by expanding sales layers like breakfast and late night,” Mr. Creed said. “I want to assure you that we remain committed to new unit development and plan to open 700 new units in China in 2015, which builds on the 737 we opened in 2014.”

A menu overhaul at Pizza Hut led to softer-than-expected results during the quarter.

Pizza Hut delivered a disappointment during the fourth quarter, after a comprehensive menu launch and rebranding effort resulted in softer-than-expected sales.

“But I absolutely believe our product and brand positioning are right, but we struggled to get our communications balance to build a new brand positioning while still connecting with our core customers,” Mr. Creed said. “Look, this is just the first innings. We are working to drive more customer trial as our advertising campaign evolves to drive sales through shopper product and pricing offers.”

The Pizza Hut division posted a 1% increase in system sales for the year and 2% growth for the quarter, as strength in international markets offset a 1% decline in U.S. system sales for the year. During the quarter, system sales at Pizza Hut in the United States rose 2%. U.S. same-store sales declined 3% for the year and were even for the quarter. Operating profit for Pizza Hut declined 13% to $295 million for the year and 11% to $80 million for the quarter.

“We have a long runway ahead of us,” Mr. Creed said. “We are making necessary decisions to drive future returns both domestically and globally.”

System sales for the KFC division increased 6% for the year and 7% for the quarter, driven by international performance and improved performance in the United States. The chain’s U.S. system sales declined 1% for the year but grew 4% in the fourth quarter, driven by 6% growth in U.S. same-store sales. Operating profit for the KFC division rose 9% to $708 million for the year and 15% to $221 million for the quarter.

Breakfast is a bright spot for Taco Bell.

System sales for the Taco Bell division advanced 4% for the year and 9% for the quarter, led by 3% growth in U.S. same-store sales for the year and a 7% increase for the quarter on the strength of the brand’s breakfast business. Operating profit grew 5% to $480 million for the year and 20% to $163 million for the quarter.

“Taco Bell continues to fire on all cylinders,” Mr. Creed said. “The breakfast launch last spring was a success and we continue to report strong margins. Breakfast was again 6% of the day part mix in the fourth quarter, and we expect to further grow the layer with additional product innovation.”

Sales and profits in China were negatively affected by adverse publicity in July regarding improper food handling by a former supplier. System sales rose 1% for the year but declined 11% for the quarter, as KFC China same-store sales fell 4% for the year and 18% for the quarter, and Pizza Hut Casual Dining same-store sales declined 5% for the year and 9% in the quarter. Operating profit for the segment fell 8% to $713 million for the year and 85% to $32 million for the quarter.

India system sales advanced 14% for the year and 6% for the quarter as the company opened 156 new restaurants, including 106 in the fourth quarter. Same-store sales declined 5% for the year and 10% for the quarter. The division had an operating loss of $9 million for the year.

Looking ahead, the company estimates earnings per share for the first quarter will be about 20% lower than the prior year. But with plans in place that include innovation across all three brands, accelerated international development, refranchising in India and China, and new digital platforms that includes a mobile ordering platform at Taco Bell, executives predict a strong rebound as the year progresses.

As for preventing a third supplier incident, the company said it has implemented whistleblower programs, increased surveillance and extensive auditing.

“While we see additional headwinds for 2015, and the recovery at KFC China is taking longer than we anticipated, we’re committed to e.p.s. growth of at least 10% and restoring our track record of double-digit e.p.s. growth going forward,” said Pat Grismer, chief financial officer, during the call.

Added Mr. Creed: “I am just totally, totally confident that we are going to turn this thing around.”
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