Sales are recovering for Yum! Brands' KFC and Pizza Hut divisions, but continue to be negative.

LOUISVILLE – Yum! Brands Inc. reported same-store sales declined 14 percent at its China division for the third quarter, signaling that food-safety problems continue to weigh on the company’s business in China.

For the third quarter ended Sept. 6, China Division operating profit fell 40 percent to $202 million. Total revenues declined 10 percent to $1.84 billion. Same-store sales in China declined 14 percent at KFC and 11 percent at Pizza Hut Casual Dining.

The company revised its outlook for the current year, saying, “It is difficult to confidently forecast the exact trajectory of China sales. In our experience, sales typically take six to nine months to recover from these types of events. With the assumption that China same-store sales continue to improve, but are negative for the fourth-quarter, we now estimate 2014 EPS growth to be between 6 percent and 10 percent versus prior year, excluding Special Items.”

“I'm absolutely confident in Yum! Brands' ability to deliver strong, sustainable growth in the years ahead despite the recent supplier incident in China, which has significantly impacted China sales, leading us to reduce our full-year EPS outlook,” said David Novak, chairman and CEO.

“China sales are on the path to recovery and we expect to develop at least 700 new restaurants in China this year, which we're confident will ultimately deliver high returns as we further capitalize on the world’s fastest-growing consuming class,” he added. “Outside of China, we expect continued solid sales and profit growth at our KFC division, led by strong international performance and improving US results. At Taco Bell, we’re extremely pleased with restaurant margins of nearly 21 percent in the quarter and the overall results of our breakfast offering, which has given us a new growth platform to build upon in the years to come. At Pizza Hut, we are making progress with our US turnaround and have major actions in place to drive same-store sales growth balance of year and beyond.”

System sales were flat at Yum's Pizza Hut Division outside China and India.

 
In September, Yum! revised its guidance for same-store sales in China following revelations about food-safety lapses involving a former supplier.

“Upon learning of these events, we terminated our relationship with OSI globally, with minimal disruption to our menu offerings in China,” the company said in its earnings statement. “Even though OSI was a minor supplier, sales at KFC and Pizza Hut were disproportionately impacted given our category-leading positions. While sales are rebounding, they continue to be negative. Our brands have proven resilient over time and we expect this to be the case with this situation as well.”

Looking beyond Yum's problems in China, the company reported a profit of $404 million for the quarter compared to $152 million a year ago. Revenues eased 3 percent to $3.35 billion.

The Taco Bell Division reported a 3 percent increase in same-store sales driven by breakfast sales. System sales grew 4 percent.

KFC reported growth in domestic and international markets outside China.

Outside China and India, system sales were flat at the company's Pizza Hut Division. International same-store sales climbed 3 percent in emerging markets, but declined 1 percent in developed markets. US same-store sales slipped 2 percent.

Yum's KFC Division reported 4 percent growth in international same-store sales in emerging markets and 3 percent growth in developed markets. Same-store sales advanced 2 percent in the US.

“Overall, our business model is compelling and we firmly believe we are building momentum behind major initiatives around the world that will drive strong sales and profit growth in 2015,” Novak said. “We remain focused on the three keys to driving shareholder value: new-unit development, same-store sales growth and generating high returns on invested capital.”