Yum Shows Global Business Success But Sluggish Profits in U.S.

Yum Brands Inc. has been feasting on profits from its growing international business in contrast to the United States, where results have remained rather slim.

The parent of KFC, Taco Bell and Pizza Hut reported surging second-quarter operating profits in China and elsewhere overseas this week.

"The U.S. continues to be a stable profit and cash-flow contributor, but we know that we can and should be performing better," Yum Chairman and CEO David C. Novak said Thursday in a conference call with industry analysts, a day after the company reported quarterly earnings.

Novak predicted U.S. operating profit growth for 2007 but said it would fall short of the company's long-term target of 5 percent.

He predicted a stronger second half for U.S. operations, including at Taco Bell — where sales dipped following an E. coli outbreak late last year.

"We are making steady improvement toward full recovery in the U.S. businesses, and look forward to a much better year in 2008 from a profit and sales standpoint," Novak said.

In the United States, operating profit fell 2 percent.

Yum projects 2007 operating profit growth of 20 percent in China and at least 10 percent for its international division. Yum said it plans to add about 1,200 restaurants this year in the two divisions.

"The overall consumer dynamics outside the United States has never been stronger," Novak said.

In the second quarter, operating profit was up 14 percent in China compared with a year ago, and 15 percent better in the international division, which posted one of its best-ever quarters.

KFC has been extremely popular in China, which is expected to have more than 2,100 restaurants in more than 400 cities by year's end.

Overall, the Louisville-based company bested Wall Street projections with 12 percent growth during the second quarter. Yum raised its full-year earnings growth forecast per share to 12 percent, from 11 percent.

"I think it's one of the better global growth stories in restaurants," said Larry Miller, a restaurant analyst with RBC Capital Markets.

Novak said there was strong growth in the Middle East, South Africa, Asia and the Caribbean. He was bullish about Yum's prospects in India and Vietnam.

"We are in the early innings in lots of key developing countries ... and we expect to see continued momentum across the world," he said.

Miller said that Yum's U.S. operations still face challenges, but predicted the second half of the year should be "somewhat better than really a difficult first half."

Much of the focus has been on Taco Bell, which had been Yum's best U.S. performer until a downturn late last year, when more than 70 people in the Northeast were sickened by E. coli.

Yum has since bolstered the testing of its lettuce supply, which was considered the most likely source of the outbreak.

Same-store sales at company-owned Taco Bell restaurants fell 7 percent in the second quarter compared with a year ago, an improvement from an 11 percent decline in the first quarter. Novak acknowledged the recovery was slower than he'd like, but noted it generally takes six to nine months for a restaurant company to recover from a food-safety scare.

"The brand is in good shape," he said. "We just have to weather this period and get our marketing plans in line and make them stronger. We think we'll come back.

Yum shares fell 53 cents, or 1.54 percent, to $33.88 Thursday afternoon.