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People dine at a KFC outlet in Shanghai. (ALY SONG/REUTERS)
People dine at a KFC outlet in Shanghai. (ALY SONG/REUTERS)

Chinese growth drives up Yum profit Add to ...

KFC parent Yum Brands Inc. reported fourth-quarter earnings that topped Wall Street’s view after accelerating sales and operating profit at established restaurants in China helped ease worries that growth in its top market was slowing.

The shares in the fast-food chain, which are up more than 25 per cent from a year ago and trading around all-time highs, rose 3 per cent to $65.10 (U.S.) in extended trading after Yum also reported better-than-expected restaurant sales growth in up-and-coming international markets.

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“They demonstrated once again that they’re one of the best consumer plays on emerging markets,” said Tucker Brown, research principal at Sustainable Growth Advisors, which holds Yum in its SGA Global Growth Fund.

Fourth-quarter sales at established restaurants in China grew 21 per cent from the year earlier and operating profit was up 15 per cent, helped by recent price hikes that should help sustain high-quality growth, Brown said.

During the third quarter, Yum’s China same-restaurant sales rose 19 per cent and operating profit was 7 per cent.

Based in Louisville, Ky., the company has almost 4,500 restaurants, mostly KFC outlets, in China. In 1987 it was the first Western fast-food brand to enter China and now has far more restaurants than competitors such as McDonald’s Corp. and Starbucks Corp.

Yum’s other brands in China are Pizza Hut, East Dawning and Little Sheep, in which it has a stake.

The company recently raised prices in that market to help offset higher food costs.

A Reuters poll in January showed China’s economic growth is likely to moderate to 8.4 per cent from 2011’s 9.2 per cent as demand at home and abroad slackens.

China’s government is attempting to gently cool the country’s red hot growth which – by driving up costs for food and labour – has pressured Chinese restaurant margins in the latest quarter and remains a concern.

Yum’s net income in the fourth quarter ended Dec. 31 grew 30 per cent to $356-million, or 75 cents per share – topping analysts’ average view by 1 cent, according to Thomson Reuters I/B/E/S.

Same-restaurant sales at Yum Restaurants International (YRI) were up 3 per cent during the quarter. That division included Yum’s other non-U.S. markets such as France, India and Russia.

Beginning in the first quarter, India will become a separate business segment at Yum.

While Yum’s business is robust in international markets, it has been working on a turnaround in its U.S. business.

Yum’s overall sales at U.S. restaurants open at least one year were up 1 per cent in the fourth quarter. That included a surprise 6 per cent rise at Pizza Hut and declines of 2 per cent at Taco Bell and 1 per cent at KFC.

The overall growth of 1 per cent “should be seen as a victory for the chronically underperforming U.S. segment of the business,” said Channing Smith, managing director of Capital Advisors, which holds Yum in its Capital Advisors Growth Fund. He recommended that investors use any pullbacks in Yum’s stock price to build a position in the company.

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