Yum! Brands: reports FY EPS Growth of four percent

Louisville / KY. (yb) Yum! Brands Inc. reported results for the fourth quarter ended December 27, 2014. EPS excluding Special Items was 0.61 USD, a decline of 29 percent. A non-cash, Special Items net charge of 361 million USD related to the write-down of Little Sheep assets was recorded in the fourth quarter. This charge impacted reported EPS by 0.80 USD for the full year. Reported EPS was (0.20) USD for the quarter and 2.32 USD for the year.

Full-Year Highlights

  • Worldwide system sales grew three percent. Worldwide restaurant margin decreased 0.5 percentage points to 14.5 percent. Worldwide operating profit increased one percent.
  • New international restaurants totalled a record 2’034, including 737 in China, 666 at KFC, 465 at Pizza Hut and 156 in India; 80 percent of this development occurred in emerging markets.
  • China Division system sales increased one percent, driven by eight percent unit growth and offset by a five percent same-store sales decline. Restaurant margin decreased 0.6 percentage points to 14.8 percent. Operating profit decreased eight percent.
  • KFC Division system sales increased six percent, driven by two percent unit growth and three percent same-store sales growth. Restaurant margin increased 0.7 percentage points to 13.3 percent. Operating profit increased 13 percent.
  • Pizza Hut Division system sales increased one percent, driven by two percent unit growth and offset by a one percent same-store sales decline. Restaurant margin decreased 3.5 percentage points to 8.2 percent. Operating profit decreased 13 percent.
  • Taco Bell Division system sales increased four percent, driven by two percent unit growth and three percent same-store sales growth. Restaurant margin decreased 0.6 percentage points to 18.9 percent. Operating profit increased five percent.
  • India Division system sales increased 14 percent, driven by 18 percent unit growth and offset by a five percent same-store sales decline.
  • Foreign currency translation negatively impacted operating profit by 27 million USD.

Fourth-Quarter Highlights

  • Worldwide system sales grew three percent. Worldwide restaurant margin decreased 4.0 percentage points to 10.2 percent. Worldwide operating profit decreased 24 percent.
  • China Division system sales decreased eleven percent, as eight percent unit growth was offset by a 16 percent same-store sales decline. Restaurant margin decreased 7.2 percentage points to 7.1 percent. Operating profit decreased 84 percent.
  • KFC Division system sales increased seven percent, driven by two percent unit growth and four percent same-store sales growth. Restaurant margin increased 1.4 percentage points to 13.8 percent. Operating profit increased 19 percent.
  • Pizza Hut Division system sales increased two percent, driven by two percent unit growth. Same-store sales were even. Restaurant margin decreased 2.7 percentage points to 6.4 percent. Operating profit decreased eleven percent.
  • Taco Bell Division system sales increased nine percent, driven by two percent unit growth and six percent same-store sales growth. Restaurant margin increased 0.3 percentage points to 20.6 percent. Operating profit increased 20 percent.
  • India Division system sales increased six percent, driven by 18 percent unit growth and offset by a ten percent same-store sales decline.
  • Foreign currency translation negatively impacted operating profit by eleven million USD.

Chief Executive´s Commentary

Greg Creed, CEO, said «We are committed to restoring our track record of delivering at least ten percent annual EPS growth year after year. I am confident we will do this in 2015 as our China business recovers and we sustain positive momentum across the rest of Yum!. Overall results in 2014 were disappointing as the Chinese supplier incident in July offset our strong first half of the year. Our top priority is to recover sales in China and capture the significant profit leverage we have in this business».

«While the sales recovery in China continues to be slower than expected, we anticipate a strong second half of 2015 as the turnaround gains momentum, led by menu innovation across the year. We continue to firmly believe in the long-term potential of China and will open at least 700 new units in what remains the world´s fastest-growing economy».

«Outside of China, we are pleased with the momentum we are seeing across the KFC and Taco Bell divisions. We expect KFC´s strong results to sustain into 2015 as robust international performance, coupled with an improving U.S. business, drive solid sales and profit growth. At Taco Bell, the 2014 launch of breakfast and mobile ordering, combined with even more breakthrough innovation in 2015, gives us confidence as we enter the new year. Finally, while the initial relaunch of the Pizza Hut brand in the U.S. did not deliver the sales lift we expected, consumers have responded positively to the new menu and we intend to leverage this more effectively going forward».

«Across Yum! we expect to open over 2’100 new international restaurants this year, further strengthening our lead in emerging markets. We remain focused on the three keys to driving shareholder value: same-store sales growth, new-unit development and generating high returns on invested capital. I am confident that this formula will produce consistent double-digit EPS growth over the long term as we continue to build three iconic global brands that people trust and champion».

Pizza Hut Division

  • Pizza Hut Division system sales increased one percent for the year and two percent for the quarter, prior to foreign currency translation.
    • For the year, international system sales grew six percent in emerging markets and one percent in developed markets; U.S. system sales declined one percent. For the quarter, international system sales grew five percent in emerging markets and one percent in developed markets; U.S. system sales grew two percent.
    • For the year, international same-store sales grew one percent in emerging markets and were even in developed markets; U.S. same-store sales declined three percent. For the quarter, international same-store sales were even for both emerging and developed markets; U.S. same-store sales were even.
  • Pizza Hut Division opened 465 new international units in 51 countries, including 247 units in emerging markets. For the quarter, Pizza Hut Division opened 257 new international units.
    • 89 percent of these new units were opened by franchisees for the year.
  • Operating margin declined 3.9 percentage points for the year and 3.2 percentage points for the quarter, driven by sales deleverage and strategic investments in international G+A.
  • Foreign currency translation negatively impacted operating profit by two million USD for the year and one million USD for the quarter.

Taco Bell Division

  • Taco Bell Division system sales increased four percent for the year and nine percent for the quarter.
    • U.S. same-store sales grew three percent for the year and seven percent for the quarter, driven by breakfast sales.
  • Taco Bell Division opened 236 new restaurants for the year; 89 percent of these new units were opened by franchisees. This included 130 new units in the fourth quarter.
  • Operating margin increased 1.4 percentage points during the year and 2.8 percentage points during the quarter, driven by same-store sales growth.

India Division

  • India Division system sales increased 14 percent for the year and six percent for the quarter, prior to foreign currency translation.
    • Same-store sales declined five percent for the year and ten percent for the quarter.
  • India Division opened 156 new restaurants for the year. This included 106 in the fourth quarter.
  • Operating loss was nine million USD for the year.
  • Effective the beginning of 2014, results from our 28 franchised stores in Mauritius are no longer included in the India Division and are included in the KFC and Pizza Hut Divisions, as applicable. India unit and system sales growth as shown here exclude Mauritius from the prior year amounts to enhance comparability.

Special Items / Tax / Share Repurchase Update

  • As previously communicated, our Little Sheep business has performed below expectations since being acquired in February 2012. As a result of our annual impairment tests, in the fourth quarter of 2014 we recorded net impairments of 361 million USD, primarily related to the Little Sheep trademark and goodwill. We previously recorded net impairments of 258 million USD in the third quarter of 2013. The remaining carrying value of the Little Sheep business is approximately 100 million USD.
  • Worldwide effective tax rate, prior to Special Items, decreased to 25.5 percent from 28.0 percent for the year. Last year´s tax rate included higher tax reserve adjustments related to a dispute with the IRS regarding the valuation of intangible assets. This issue was resolved in 2014.
  • For the year, we repurchased 11.2 million shares totalling 820 million USD at an average price of 73 USD. For the quarter, we repurchased 4.4 million shares totalling 310 million USD at an average price of 71 USD.