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People dine at a Kentucky Fried Chicken (KFC) outlet in Shanghai in this file photo taken February 3, 2010. (ALY SONG/REUTERS)

People dine at a Kentucky Fried Chicken (KFC) outlet in Shanghai in this file photo taken February 3, 2010.

(ALY SONG/REUTERS)

Inflation in China weighs on Yum Brands Add to ...

Yum Brands Inc., owner of the Taco Bell, Pizza Hut and KFC chains, said Wednesday its second-quarter net income rose 5 per cent, overcoming a rare setback in China with the help solid sales elsewhere, including supersized gains at U.S. Taco Bell stores.

The company said its operating profit sagged by 4 per cent in China, adjusted for currency fluctuations, as a result of high commodity inflation that squeezed restaurant profitability. The company also ramped up around-the-clock operations and home delivery at more KFC stores in China, another contributor to higher costs, said Jonathan Blum, a Yum senior vice-president.

Mr. Blum said the company expects a return to double-digit profit growth in the second half of the year in China, traditionally its most profitable division. Yum continued its fast expansion, opening 160 new stores in China in the quarter. It expects record new-unit development reaching at least 700 stores this year in China.

Yum now has more than 3,900 KFC restaurants in China.

Meanwhile, U.S. operating profit was up 26 per cent in the quarter amid stronger sales at all three chains, led by Taco Bell.

Taco Bell had a 13 per cent increase in sales at U.S. restaurants open at least a year, as the chain capitalized on the popularity of its new tacos featuring shells made out of Nacho Cheese Doritos. The figure, an important measurement of restaurant performance because it leaves out stores that have recently opened or closed, rose 4 per cent at Pizza Hut and 1 per cent at KFC.

Operating profit in Yum’s international division, which excludes China and India, rose 6 per cent, adjusted for currency fluctuations.

Yum reported net income of $331-million (U.S.), or 69 cents per share, in the three months ended June 16. That’s up from $316-million, or 65 cents per share, a year ago. Revenue rose 12 per cent to nearly $3.2-billion.

Analysts expected earnings of 70 cents per share on revenue of $3.12-billion, according to FactSet.

The Louisville-based company reaffirmed its full-year forecast of earnings-per-share growth of at least 12 per cent, or at least $3.22, excluding special items.

Yum operates more than 37,000 restaurants in more than 110 countries and territories.

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