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Yum Brands Inc. (YUM) is confident in the continued expansion of its Pizza Hut Casual Dining and KFC restaurants in China, despite recent slowing in the Chinese economy.
In the first quarter, Yum continued to open restaurants rapidly in China, but due to double-digit food and labor inflation, its profit margins were squeezed and same-store sales growth wasn't as high as previous quarters--issues Yum acknowledged previously.
"We simply cannot expect 19% same-store sales growth going forward, but fortunately, our ongoing business model does not need the high level of same-store sales growth we recently experienced," said Chief Financial Officer Rick Carucci on a conference call.
Investors still seem to think Yum may have peaked in China, as Yum's shares fell 2.3% to $71.23 Thursday, retreating from the boost it received in the few days leading up to earnings.
However, as the company ventures further into smaller-tier cities in China, it says the expansion opportunities are vast.
Yum says that even though its first quarter margin retreated a bit to 23.6%, and same-store sales growth of 14% fell slightly below expectations, both figures are still stronger than most of its competitors and its own businesses elsewhere in the world. China continues to be its biggest driver for growth, and Yum plans to open 600 new units there this year.
"Long-term economic trends are also working in our favor in China. Rising incomes are making our brands even more affordable for an increasing number of people and the consumer class is expected to double over the next 10 years to well over 600 million consumers," said Chief Executive David Novak. With those "overwhelming macro tail winds," Novak says, Yum's long-term goal is to grow same-store sales at least 5%. Though that's a significant moderation from the recent double-digit results, it's only natural as a business matures.
That's why Yum is putting increased focus on its newer emerging markets, such as India, Vietnam, Indonesia and Brazil, which are in the much earlier stages of Yum's development. Leaders of those markets will be going to China in June to "look at the China operating model and take that same model and apply it into those markets," Novak said.
Like McDonald's Corp. (MCD) and Starbucks Corp. (SBUX), Yum's western brands have been a big hit among Chinese consumers. Yum's Pizza Hut Casual Dining restaurants offer high-end fare, such as spaghetti, steak and shrimp salads. Meanwhile, KFC has the advantage of the intense popularity of chicken among Chinese consumers. But the race against McDonald's for value perception remains.
"If you look at McDonald's, the success they had, they broke the mold when they had 15-cent hamburgers--We're making our brands now as affordable as they can possibly be in China, and we're doing it at great margins," Novak said.
-By Annie Gasparro, Dow Jones Newswires; 212-416-2244; email@example.com