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Yum Brands Inc.'s (YUM) profit rose 73% in the first quarter, but economic challenges in China--the biggest contributor to the company's earnings--pose a threat to its profitability potential there.
The parent company of Taco Bell, KFC and Pizza Hut has staked much of its future on emerging markets, especially China, where its Pizza Hut Casual Dining and KFC chains are booming in urban areas.
But Yum faced 10% commodity inflation and 17% wage inflation in China in the first quarter, causing restaurant margins there to fall year over year to 23.6% from 25.1%. China's rising food and labor costs, as well as signs of an economic slowdown, could put Yum at risk of losing its overseas edge.
Shares of Yum were trading down 1% at $72.25 after market hours Wednesday.
For the first quarter, China posted 14% same-store sales growth and increased guest transactions, but that's still a pullback in momentum from previous quarters, which had same-store sales growth of around 20%.
However, Yum's management continues to see strong sales in the offing. The company raised its full-year earnings growth forecast to at least 12%, given the strength of its first-quarter results, including a turnaround in the U.S.
Yum also reported its India business as a standalone segment for the first time, a strong indication of its interest in expansion there, given that the only other international market it breaks out is China. Same-store sales grew 8% in India, and the company expects to add 100 new units there this year.
The rest of Yum's international markets posted an 8% same-store sales boost, with a focus on high-growth emerging markets.
Yum's domestic business has struggled, appearing to take a back seat to the company's international efforts. However, it sold off two smaller domestic chains last year, and the company says it expects to make a comeback in the U.S. this year, with Taco Bell undergoing a major revamp and Pizza Hut showing same-store sales growing at the end of 2011.
U.S. same-store sales growth in the latest period rose 5% as a turnaround seems to have taken hold at all three chains.
Yum posted a first-quarter profit of $458 million, or 96 cents a share, up from $264 million, or 54 cents a share, a year earlier. Excluding special items, per-share earnings rose to 76 cents from 63 cents. Revenue increased 13% to $2.74 billion.
Analysts polled by Thomson Reuters expected a profit of 73 cents a share on revenue of $2.7 billion.
Worldwide restaurant margin improved 1.2 percentage points to 18.6% for the quarter, despite the weakening in China.
The company is scheduled to host a conference call with analysts Thursday morning.
-By Annie Gasparro and Ben Fox Rubin, Dow Jones Newswires; 212-416-2244; email@example.com