Yum! challenged by 'malaise in the U.S.'

by Monica Watrous
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KFC Crispy Chicken, Yum! Brands
KFC marked its eighth consecutive quarter of same-store sales growth in the U.S. behind the strength of recent promotions, such as Extra Crispy chicken.

LOUISVILLE, KY. — Yum! Brands, Inc. executives hope to drive improved sales performance at KFC, Taco Bell and Pizza Hut over the next six months after “a malaise in the U.S.” challenged results in the recent quarter, said Greg Creed, chief executive officer.

Yum! Brands net income in the second quarter ended June 11 rose 44% to $339 million, equal to 82c per share on the common stock, from $235 million, or 54c per share, in the prior-year period. Excluding special items, earnings per share rose 9%. Results were helped by better-than-expected results in the company’s China business, which it plans to spin off into a separate company this October.

Total revenues declined 3% to $3,008 million from $3,105 million.

Greg Creed, Yum! Brands
Greg Creed, c.e.o. of Yum! Brands

“Outside of China, challenging industry conditions in the U.S. contributed to soft sales results,” Mr. Creed said during a July 14 earnings call with financial analysts. “However, our three brand divisions in the aggregate delivered core operating profit growth largely in line with our expectations and remain on track to deliver against their full-year core operating profit growth targets. We are confident in our plans to drive second-half sales improvement led by a continuous focus on innovation, value and our core products.”

At Pizza Hut, same-store sales grew 1% in the United States, which makes up approximately 60% of the division’s sales.

“While second-quarter results in the U.S. were softer than expected as competitors responded to our first-quarter success with more aggressive promotions, we are pleased to see transaction growth in the U.S. and a continuation of the positive sales trends in our U.S. business,” Mr. Creed said. “We believe our focus on making it easier to get a better pizza, whether it be by providing consistent value through the $5 Flavor Menu and $6.99 ANY Medium Pairs Deal, or by improvements in technology...”

Pizza Hut pizza pair for $6.99 deal, Yum! Brands
Transaction growth grew for Pizza Hut, fueled by value offerings such as the $6.99 ANY Medium Pairs Deal.

KFC marked its eighth consecutive quarter of same-store sales growth in the United States, up 2% from the prior year, behind the strength of recent promotions, such as Extra Crispy chicken.

“As further evidence we are gaining traction with our strategy in the U.S., our two-year same-store sales growth lapped 3% growth in the prior year, so on a two-year basis, comps were plus 5%,” Mr. Creed said.

Same-store sales at Taco Bell in the United States declined 1%, which compared with a gain of 6% in the year-ago quarter.

“While a plus 5% on a two-year stack is ahead of the category, we expect more out of Taco Bell given the strength of this brand,” Mr. Creed said. “In the current environment, we need to pair innovation with value that clearly resonates with our consumers.

Taco Bell $5 Cravings Deal, Yum! Brands
Taco Bell's $5 Cravings Deal bundle improved results toward the end of the second quarter.

“For example, our $5 Cravings Deal bundle improved results toward the end of the second quarter, and through the first five weeks of the third quarter, same-store sales are positive. We believe that the Taco Bell brand is extremely well-positioned to succeed in a challenging environment. In market research, Taco Bell always ranks as one of the top brands in providing value and innovation to consumers.”

Based on first-half results and current trends in China, the company raised its full-year core operating profit growth forecast to at least 14% from 12%.

“2016 is truly a transformational year for Yum!,” Mr. Creed said. “We are confident we will deliver at least 14% core operating profit growth, and I’m pleased with the momentum in our China business as we near completion of the China separation.”
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