Yum!'s Quarterly Call Focuses on KFC, Pizza Hut & New Businesses in China

Yum! Brands (YUM) reported quarterly results late last week. Its earnings call (link to full transcript) was dominated by discussion of Yum!'s China operations including glowing reports of strong margins, Mainland expansion and new services. Key excerpts from Chairman, President and CEO David C. Novak:

On KFC

....In our China division, as I said last quarter, we are back and booming once again. With KFC, we are moving at an aggressive pace in mainland China with development growth of nearly 20%. We now have nearly 1700 KFCs.

Returns remain very strong, our very best in the world and we continue to expand in more cities. We will likely be in about 400 cities by year-end, building a great base for the KFC brand everywhere in China.

The summary for KFC is we are the dominant leader and we are moving full steam ahead.

On Pizza Hut

You also need to recognize that our Pizza Hut casual dining business in mainland China is now a major business as well. We have now reached major scale levels, with over 225 casual dining restaurants and development is strong with excellent returns, similar to KFC.

We are excited because Pizza Hut casual dining is growing units at a 20% rate versus last year, with solid same-store sales growth. We are in over 50 cities and clearly the undisputed leader in the casual dining category.

On Pizza Hut Home Service

Now let’s talk about the third brand we have been working on developing for full scale expansion -- Pizza Hut Home Service. We have 33 units currently in five cities, and the overall economic models for this delivery business looks very promising. We are excited as we just completed a TV test in Shanghai with our first ad campaign to drive this business. The results were very good and we are ready to roll to more cities.

There is no doubt the home service market is emerging in mainland China, and we will be there to capitalize on the opportunity.

Summary

To summarize, our China business had a great third quarter with profit growth of 26%, and we are up 38% year-to-date, so clearly our two-year trends are excellent. Importantly, we are opening over 400 new restaurants and achieving record restaurant margins, even while rapidly developing and building new brands like Pizza Hut Home Service and East Dawning, our fast food Chinese restaurant concept.

We continue to believe that KFC ultimately has the potential for 14,000 locations, similar to the level of development by McDonald’s in the United States, and that we ultimately have the potential for about 2,000 Pizza Hut casual dining locations, similar to Applebee’s in the United States. That is 16,000 restaurants before you would consider the potential of Pizza Hut Home Service and East Dawning. Our belief is that ultimately, we will have at least 20,000 restaurants in China.

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