Yum Brands upbeat about China division

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Associated Press

Posted on October 10, 2012 at 10:02 AM

Updated Wednesday, Oct 10 at 11:01 AM

LOUISVILLE, Ky. (AP) — The owner of the Taco Bell, Pizza Hut and KFC chains predicted Wednesday its fast-growing China business will serve up another round of strong profit growth next year despite a slowing economy in its most important overseas market.

Yum Brands Inc. executives also foreshadowed more menu rollouts in the coming year at its flourishing Taco Bell business in the U.S.

The Mexican-style chain has seen its sales grow on the popularity of its Doritos Locos Tacos, with shells made out of Nacho Cheese Doritos, followed by a rollout of more upscale food created by celebrity chef Lorena Garcia.

Yum's stock rose more than 8 percent to $71.43 in late-morning trading.

One day after reporting a quick profit turnaround in its China division, Yum executives said they're confident of achieving 15 percent profit growth in China next year, driven partly by a record pace of restaurant openings and new product introductions.

"Our China business is having another strong year," Yum Chairman and CEO David C. Novak told industry analysts Wednesday. "But as I've said before, China is going to have its inevitable ups and downs. ... We now face a slowing economy. But that doesn't change our long-term outlook in China one iota. Our annual performance has been pretty consistent, and I expect this to continue."

China's economic growth fell to 7.6 percent in the three months ended in June. That's robust by the standards of the United States and Japan, where growth this year is forecast in low single digits. Analysts are forecasting a rebound in China late this year or in early 2013.

"China, even with its challenges, is still growing at a reasonable pace," Novak said.

Yum said Tuesday its third-quarter operating profit in China rose 22 percent, a quick rebound from a decline the quarter before.

That turnaround in China, coupled with strong profit growth at its restaurants in the U.S. and elsewhere around the world, helped Yum post a 23 percent increase in its third-quarter net income.

The second-quarter profit decline had been a rare event for Yum in China, and was blamed on rising costs for ingredients and workers. Those costs have since moderated, helping improve profits.

Yum opened its 4,000th KFC in China in August, and has ramped up its breakfast offerings, 24-hour operations and delivery services at more KFC stores there. Pizza Hut has a growing presence there, too.

Sales growth has slowed in Yum's Chinese restaurants open at least a year, but the combination of new restaurant growth and product introductions — along with a growing middle class — makes Yum confident of reaching its goal of 15 percent profit growth in 2013. It also expects double-digit profit growth in the fourth quarter.

Yum now expects to open at least 750 stores in China this year, up from its prior forecast of at least 700.

"From day one, we've never been chasing a number," Novak said. "The number just keeps getting bigger and bigger than what any of us ever expected."

The company has thousands of future restaurant managers in training to run its growing number of stores in China.

In the U.S., Taco Bell has been the catalyst behind Yum's strong performance. Third-quarter operating profit in the U.S. rose 13 percent.

Sales in U.S. restaurants open at least a year rose by 7 percent at Taco Bell in the quarter. That figure is key for retailers because it excludes new and closing stores. It rose 6 percent at Pizza Hut and 4 percent at KFC.

Yum executives said Wednesday that Taco Bell will expand its line of Doritos Locos Tacos next year.

"Part of the reason we pushed that into 2013 is because the product was so successful it basically used all of our available supply of taco shells," said Yum President Rick Carucci.

Yum has more than 38,000 restaurants in more than 120 countries and territories.

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