Yum! Brands Reports Third-Quarter 2013 EPS Declined 15%, Excluding Special Items

Yum! Brands
Published: October 9th, 2013

Soft KFC China Sales and Higher Tax Rate Reduce Full-Year EPS Expectations

LOUISVILLE, Ky. - (BUSINESS WIRE) - Oct. 8, 2013 - Yum! Brands, Inc. (NYSE: YUM) today reported results for the third quarter ended September 7, 2013, including EPS of $0.85, excluding Special Items. Reported EPS was $0.33 for the quarter, which included a $0.55 non-cash charge related to the write-down of Little Sheep intangible assets.

Third-Quarter Highlights

• Worldwide system sales grew 1%, prior to foreign currency translation, including 5% growth at Yum! Restaurants International (YRI). System sales declined 2% in China and were flat in the U.S.
• Same-store sales declined 11% in China. Same-store sales grew 1% at YRI and were flat in the U.S.
• Total international development was 364 new restaurants; 79% of this development occurred in emerging markets.
• Worldwide restaurant margin declined 1.3 percentage points to 17.6%, including declines of 1.9 percentage points in China, 0.6 percentage points at YRI and 0.7 percentage points in the U.S.
• Worldwide operating profit declined 9%, prior to foreign currency translation, including declines of 14% in China and 2% at YRI. Operating profit grew 1% in the U.S.
• Worldwide effective tax rate, prior to Special Items, increased to 33.1% from 25.1% driven primarily by a tax reserve adjustment. The tax rate increase negatively impacted EPS results by 10 percentage points.
• A non-cash, Special Item net charge of $258 million related to the write-down of Little Sheep intangible assets was recorded in the quarter. This charge impacted reported EPS by 55 percentage points.
• On September 19, 2013, the Company announced a 10% increase in its quarterly dividend, marking the ninth consecutive year the dividend increased at a double-digit percentage rate.

China Sales Update

• September same-store sales, which will be included in China Division’s fourth-quarter results, declined an estimated 11% for the China Division. This included estimated growth of 6% at Pizza Hut Casual Dining and an estimated decline of 13% at KFC, where sales have not yet fully recovered from the adverse publicity surrounding the December poultry supply incident.

Revised Full-Year Outlook

Based on KFC China sales for September, it is now unlikely China Division same-store sales will be positive for the fourth quarter. Given lower-than-expected China sales and a higher-than-expected full-year tax rate, the Company now estimates a high-single to low-double-digit full-year EPS decline versus prior year, excluding Special Items. This compares to our previous guidance of a mid-single-digit decline in EPS.

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David C. Novak Comments

David C. Novak, Chairman and CEO, said, "Despite the disappointing third-quarter performance, I remain as confident as ever in our ability to deliver strong, sustainable growth in the years to come. Given a slower-than-expected sales recovery at KFC China and a higher-than-expected tax rate, we are now estimating a high-single to low-double-digit percentage decline in full-year EPS versus prior year, excluding Special Items. Our revised full-year EPS outlook is obviously well below our 11-year track record of double-digit growth through 2012. We also recorded a significant non-cash Special Item charge for the write-down of Little Sheep intangible assets. Little Sheep remains the number-one brand in China’s largest casual dining category, and we remain committed to this concept as an engine of future growth.

Even with our recent challenges, KFC is unquestionably the category leader in China and we remain confident sales will fully recover from the adverse publicity surrounding the December poultry supply incident. Our Pizza Hut business in China continues to deliver strong results, and the rest of Yum! is performing generally as expected for the full year. I’m pleased with the strong margin performance in China in the face of significant sales deleverage, along with the fact that Taco Bell has produced seven consecutive quarters of positive same-store sales growth. We remain on the ground floor of global growth and continue to have unparalleled development opportunities. As evidence of this, we expect to open at least 700 new units in China this year, as we capitalize on the world’s fastest growing consuming class. Outside of China, we expect record new-unit openings for Yum! Restaurants International and in India this year. When you add it all up for Yum!, we will open at least 1,850 new restaurants outside the U.S., further strengthening our leadership position in emerging markets. In addition, we will have net new-unit growth in the U.S. for the second consecutive year.

We expect to deliver at least 20% EPS growth in 2014 and restore our track record of double-digit EPS growth in the years ahead. Our business model remains compelling and we will continue to invest behind the enormous growth opportunities we see around the world."

China Division

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• China Division third-quarter sales and profits were impacted by adverse publicity surrounding the December poultry supply incident and subsequent news of Avian flu.
• System sales decreased 2%, prior to foreign currency translation.
  • Same-store sales declined 11%, including a 14% decline at KFC and 5% growth at Pizza Hut Casual Dining.
• China Division opened 132 new units in the third quarter, and 458 new units year-to-date.

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• Restaurant margin decreased 1.9 percentage points to 19.5%. Significant sales deleverage was partially offset by restaurant operating efficiencies. Little Sheep negatively impacted overall restaurant margin by approximately 1 percentage point.
• Foreign currency translation positively impacted operating profit by $12 million.
• We are temporarily providing monthly same-store sales releases until sales have recovered. We will release October same-store sales for our China Division on November 12, 2013, after market hours.

Yum! Restaurants International (YRI) Division

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• YRI Division system sales increased 5%, prior to foreign currency translation, driven by new-unit development and 1% same-store sales growth.
  • Emerging markets system sales grew 11%, driven by 7% unit growth and 4% same-store sales growth.
  • Developed markets system sales were flat, including 1% unit growth. Same-store sales declined 1%, driven primarily by weak results in Japan and Pizza Hut UK.
  • The timing of Ramadan had an estimated negative same-store sales impact of about 1%. This negative impact is expected to reverse in the fourth quarter and benefit same-store sales by about 1%.
• YRI opened 215 new units in 50 countries, including 139 in emerging markets.
  • 90% of all new units were opened by franchisees.
• Restaurant margin declined 0.6 percentage points, driven by margin performance in KFC UK and Turkey.
• Operating profit declined 2%, prior to foreign currency translation. Operating profit was negatively impacted 3 percentage points from expenses related to the bi-annual franchisee convention.
• Foreign currency translation negatively impacted operating profit by $6 million.

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U.S. Division

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• U.S. Division same-store sales were flat; consisting of 2% growth at Taco Bell, a 1% decline at Pizza Hut and a 4% decline at KFC.
• Restaurant margin decreased 0.7 percentage points, driven primarily by inflation and promotional activities.
• Operating profit growth was 1%. Excluding the impact of refranchising, operating profit grew 6%.

India Division

• India Division system sales increased 20%, prior to foreign currency translation, driven by 24% unit growth. Same-store sales were flat.

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Ownership / Special Items / Tax Update

• Our Little Sheep business has performed below expectations since we acquired a controlling interest in February 2012. While we continue to have confidence in the long-term potential of Little Sheep, the sales and unit growth we forecasted at acquisition have not materialized. Initially, sales growth was negatively impacted by a longer-than-expected purchase approval and ownership transition. In May 2013, negative publicity from quality issues with other unrelated hot pot concepts in China further significantly impacted sales at Little Sheep, even though there was never an issue with the quality of Little Sheep products. This negative sales impact continued in the third quarter. A net impairment charge for certain Little Sheep assets totaling $258 millionwas recorded as a Special Item, consistent with the classification of the $74 million gain that was recorded in 2012 upon our consolidation of Little Sheep.
• In the U.S., we refranchised 54 units and received proceeds of $58 million. We recorded pre-tax U.S. refranchising gains of $37 million in Special Items.
• Our worldwide effective tax rate for the quarter, prior to Special Items, increased from 25.1% to 33.1%. This increase is primarily related to the continuing dispute with the IRS regarding a valuation of intangibles, which has been disclosed in our prior SECfilings, and is not expected to meaningfully impact our effective tax rate in future years. Our full-year 2013 global effective tax rate is now expected to be approximately 28%.

Share Repurchase Update

• Year-to-date through October 7, 2013, we repurchased 7.1 million shares totaling $490 million at an average price of $69.

Conference Call

Yum! Brands, Inc. will host a conference call to review the company’s financial performance and strategies at 9:15 a.m. Eastern Time Wednesday, October 9, 2013. The number is 877/815-2029 for U.S. callers and 706/645-9271 for international callers.

The call will be available for playback beginning at noon Eastern Time Wednesday, October 9, through midnight Saturday, November 9, 2013. To access the playback, dial 855/859-2056 in the United States and 404/537-3406 internationally. The playback pass code is 71909779.

The webcast and the playback can be accessed via the internet by visiting Yum! Brands’ Web site, www.yum.com/investors and selecting "Q3 2013 Earnings Conference Call" under "Investment Events." A podcast will be available within 24 hours.

Additional Information Online

Quarter end dates for each division, restaurant-count details and definitions of terms are available online at www.yum.com under "Investors."

This announcement, any related announcements and the related webcast may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected. Factors that can cause our actual results to differ materially include, but are not limited to: food safety and food borne-illness issues; economic conditions, consumer preferences, adverse publicity, tax rates, the regulatory environment, increased competition and other risks in China, where a significant and growing portion of our restaurants are located; economic and political conditions in the other countries where we operate; the success of our international development strategy; commodity, labor and other operating costs; our ability to secure and maintain distribution and adequate supply to our restaurants; the continued viability and success of our franchise and license operators; publicity that may impact our business and/or industry; pending or future litigation and legal claims or proceedings; the impact or threat of any widespread illness or outbreaks of viruses or other diseases; consumer preferences and perceptions of our brands; the success of our refranchising strategy; significant changes in global economic conditions, including consumer spending, consumer confidence and unemployment; new and changing government regulations; our effective tax rates and disagreements with taxing authorities; our ability to protect the integrity and security of individually identifiable data of our customers and employees; competition within the retail food industry, including with respect to price and quality of food products, new product development, advertising levels and promotional initiatives, customer service, reputation, restaurant location, and attractiveness and maintenance of properties; and risks associated with the Little Sheep business. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions "Risk Factors" and "Forward-Looking Statements" in our Annual Report on Form 10-K) for additional detail about factors that could affect our financial and other results. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. We are not undertaking to update any of these statements.

Yum! Brands, Inc., based in Louisville, Kentucky, has nearly 40,000 restaurants in more than 130 countries and territories. Yum! is ranked #201 on the Fortune 500 List with revenues of over $13 billion in 2012 and in 2013 was named among the top 100 Corporate Citizens by Corporate Responsibility Magazine. The Company’s restaurant brands - KFC, Pizza Hut and Taco Bell - are the global leaders of the chicken, pizza and Mexican-style food categories. Outside the United States, the Yum! Brands system opened over five new restaurants per day, making it a leader in international retail development.

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Source: Yum! Brands, Inc.

Contacts:

Yum! Brands, Inc.

Analysts Contact
Steve Schmitt
888-298-6986
Vice President
Investor Relations

Donny Lau
88-298-6986
Director Investor Relations

Media Contact
Amy Sherwood
502-874-8200
Vice President Public Relations