By Annie Gasparro
The chief executive of Yum Brands Inc. (YUM), the parent company of Taco Bell, KFC and Pizza Hut, said Thursday it remains "very confident" in its China business, despite economic growth slowing in the country.
"We have never whined about the macros," Chief Executive David Novak said at Yum's annual investor meeting in New York. The truth is that the company's fast-growing KFC and Pizza Hut Casual Dining chains simply couldn't stand up to last year's extremely high growth, he said.
In the fourth quarter of 2011, Yum's sales at established restaurants rose 21% in China, but it expects sales to drop 4% in the fourth quarter this year. Yum's shares fell nearly 10% last week when it announced that lower-than-expected guidance, and investors questioned whether Yum's brands are losing traction among Chinese consumers.
Yum's executives remained upbeat on Thursday, saying same-store sales in China will return to mid-single-digit growth next year, with more of that coming in the second half of the year as prior results become easier to lap.
The Louisville, Ky.-based company has been one of the most successful foreign brands in China, with roughly 5,000 restaurants in the country.
While that's far fewer than the 18,000-plus locations it has in the U.S., China contributes more to Yum's overall business than any other foreign country, at times making up nearly half of its quarterly operating profit.
Going forward, as the country matures, China will naturally become less of a force on Yum's balance sheet. "China is getting to be a lot bigger, and with a bigger base you're going to grow a little more slowly," Chief Financial Officer Pat Grismer said. Still, he added, "I don't know of many other scaled businesses that have doubled in size in three years."
However, some investors challenged Yum's confidence, pointing to Starbucks Corp. (SBUX), another major American brand in China, which said Wednesday at its investor day that same-store sales growth in the China and Asia-Pacific region hasn't slowed over the past two months.
Yum raised its menu prices in China this year, which could have caused cost-conscious consumers to fall away from the brands. But Yum says the move didn't impact customer traffic, and that KFC and Pizza Hut both still have strong value perceptions in the country.
The murkier outlook in China has caused some analysts to lower their expectations for Yum's stock recently, saying it may be a risky bet in the near future. Over the past year, shares of Yum have risen about 15%.
Yum maintains that it doesn't need to drastically change its strategy in China. In sticking with the plan, Yum will speed up new-store development, allowing the division to rely less on sales at existing stores. Also, the addition of hundreds of new restaurants will increase its marketing fund, allowing it to promote the brands more widely throughout the country, Mr. Novak said. And, going into smaller cities, where rent and labor costs are lower, will help new stores generate a higher return on their investment.
On average this year, Yum will have opened two restaurants each day in China. In addition to KFC and Pizza Hut Casual Dining, the company is also expanding its Pizza Hut Home Delivery and recently acquired Little Sheep hot-pot restaurants there.
Yum said it expects the weakness in China this year to be offset by stronger-than-expected operating performance in other overseas markets and in its U.S. division. The company says newer emerging markets, such as India and Africa, will become bigger growth drivers for the company as China matures. For instance, Yum says that in India, KFC is the fastest growing fast-food brand, expanding at twice the rate of its biggest competitor.