Yum! Brands: Announces Full-Year 2012 EPS Growth of 13%

Louisville / KY. (yb) Yum! Brands Inc. reported results for the fourth quarter ended December 29, 2012 including EPS of 0,83 USD, excluding Special Items. Reported EPS was 0,72 USD for the quarter and 3,38 USD for the year.

Full-Year Highlights

  • Worldwide system sales grew five percent, prior to foreign currency translation.
    • Worldwide system sales growth was eight percent, excluding the 2011 divestiture of Long John Silver´s (LJS) and A+W All American Restaurants (A+W), the 53rd-week impact and the acquisition of Little Sheep, including 17 percent in China, seven percent at Yum! Restaurants International (YRI) and five percent in the U.S. The 2011 fourth-quarter and full-year results reflect the benefit of an additional (53rd) week.
  • Same-store sales grew four percent in China, three percent at YRI and five percent in the U.S.
  • Worldwide restaurant margin increased 0,6 percentage points to 16,6 percent.
  • Worldwide operating profit grew twelve percent, prior to foreign currency translation.
  • Record international development with 1’976 new restaurants opened, including 889 new units in China, 949 new units at YRI and 138 in India Division; 83 percent of this development occurred in emerging markets.

Fourth-Quarter Highlights

  • China Division KFC same-store sales turned sharply negative during the last two weeks of December as a result of adverse publicity from the poultry supply situation.
  • Worldwide system sales were flat, prior to foreign currency translation.
    • Worldwide system sales growth was five percent, excluding the 2011 divestiture of LJS and A+W, the 53rd week impact and the acquisition of Little Sheep, including seven percent in China, seven percent at YRI and three percent in the U.S.
  • Same-store sales grew three percent at YRI and three percent in the U.S. Same-store sales declined six percent in China.
  • Worldwide restaurant margin increased 0,1 percentage point to 14,4 percent.
  • Worldwide operating profit grew six percent, prior to foreign currency translation. Operating profit grew ten percent at YRI, declined five percent in China and declined five percent in the U.S.
    • Excluding the 53rd-week impact, worldwide operating profit grew eleven percent, including 15 percent at YRI and five percent in the U.S.

China Update

KFC sales in the last two weeks of the fourth quarter were significantly impacted by the intense media attention surrounding an investigation by the Shanghai FDA (SFDA) into poultry supply management at Yum! China. The investigation was prompted by a report broadcast on China´s national television (CCTV), which aired on December 18, 2012. The report showed that a few poultry farmers were ignoring laws and regulations by using excessive levels of antibiotics in chicken. Regrettably, some of this product was purchased by two poultry suppliers of KFC China. The investigation caused further media attention, including social media commentary, and this negatively affected consumer perceptions of poultry safety, and KFC in particular.

On January 25, 2013, the SFDA concluded its investigation and released its recommendations. We appreciate their thorough and diligent review. The SFDA identified issues and provided «Supervisory Recommendations» to Yum! China to strengthen our poultry supply chain practices including refined voluntary self testing procedures, improved reporting and communications and enhanced supplier management. Our team in China has taken a comprehensive review of our current system and is in the process of incorporating all of the SFDA´s recommendations. We have always recognized the importance of building a world-class supply chain in China, which is why we have implemented a wide range of quality assurance and testing practices over the years above legal and regulatory standards. The SFDA´s recommendations will further strengthen those practices. The SFDA did not bring a case against Yum! China and no fine was assessed.

The past seven weeks of media attention have been intense and negative towards the KFC brand image. Even though this is a very disappointing setback, we are more committed than ever to continue to strengthen our efforts, restore the confidence of our customers and win back their brand loyalty. To that end, the China team will soon be launching a brand reputation quality campaign to re-assure consumers of our high quality food, along with aggressive marketing plans.

2013 Outlook

Yum! Brands is confident the YRI and U.S. businesses will deliver annual operating profit growth consistent with our ongoing growth model. Given current uncertainties related to KFC sales in China, it is difficult to confidently forecast our overall financial performance. We have made the assumption that KFC China same-store sales will improve as the year progresses and will be positive in the fourth quarter. With these assumptions, we estimate a mid-single digit EPS decline in 2013 versus prior year, excluding Special Items. This includes an expectation for a significant decline in EPS performance in the first half of the year followed by EPS growth in the second half.

The first quarter for our China business includes only the months of January and February and is highly impacted by consumer spending during the Chinese New Year holiday. The timing of this holiday changes each year. This year it is important to note that while the timing impact of Chinese New Year is neutral to our first quarter, there is a significant negative impact to January sales and a corresponding significant benefit to February sales due to the timing of this week-long holiday. We expect that the underlying performance of our China business will remain relatively unchanged for the balance of the first quarter, with a same-store sales decline of approximately 25 percent for January and February combined (China´s first quarter).

Chairman´s Commentary

David C. Novak, Chairman and CEO, said, «We delivered full-year 2012 EPS growth of 13 percent or 3,25 USD per share, excluding Special Items. This marks the 11th consecutive year we delivered at least 13 percent growth, which puts us in an elite group of high-growth companies. We also take satisfaction with our record level of international development in 2012 which lays the foundation for future growth and makes Yum! a leader in emerging market development. With new-unit development at the core of our growth model and the continued rapid expansion of the consuming class overseas, we believe our opportunity for long-term growth has never been better».

«We are obviously proud of our track record of achieving double-digit EPS growth, and I am as confident as ever we can deliver this performance over the long term. However, as a result of adverse publicity from the poultry supply situation in mid-December, China KFC sales experienced a sharp decline. Due to continued negative same-store sales and our assumption that it will take time to recover consumer confidence, we no longer expect to achieve EPS growth in 2013».

«Although we cannot predict how long it will take to restore sales, we are steadfast in our belief that the power and popularity of the KFC brand in China will ultimately drive a full sales recovery. Having weathered other storms in the past, we know that our brands are resilient. As a result, we will stay the course with our target to develop at least 700 new units in 2013 in China to lay the foundation for future growth, and will not let this event detract from our unparalleled China growth opportunity».

«Our growth strategies are unchanged, in China, Yum! Restaurants International, India and the U.S. With our category-leading brands and outstanding people capability, I´m confident we will bounce back strongly and restore our track record of double-digit EPS growth in the years ahead».