Yum Margins Weaken, Sending Shares Lower

Yum Brands, parent company of Taco Bell, Pizza Hut and KFC, on Wednesday posted a 5 percent rise in quarterly profit, but shares fell more than 5 percent as rising commodity prices ate into restaurant margins in the United States and China.

Continued sales growth from China drove second-quarter net income at Louisville, Kentucky-based Yum to $224 million, or 45 cents per share, from $214 million, or 39 cents per share, in the year-ago quarter, topping Wall Street targets of 42 cents, according to Reuters Estimates.

A KFC restaurant in Boston.
Steven Senne
A KFC restaurant in Boston.

However, sales growth easily outpaced the profit rise, leaving margins down, especially in key markets.

Edward Jones analyst Jack Russo said commodity price inflation in China and the United States likely sent shares lower in extended trade after an initial pop.

"China margins were weaker than some of us expected," said Russo, who added that domestic margins were also softer than anticipated.

Restaurant profit margins in China fell to 17.1 percent from 18.2 and in the United States to 12.4 percent from 15.3 percent.

Total revenue grew to $2.65 billion from $2.37 billion a year earlier. Worldwide sales at stores open at least a year were up 4 percent, including 14 percent growth from mainland China. International same-store sales were up 4 percent, while the company's U.S. business saw same-store sales rise 2 percent.

Restaurant margins in China and the United States were eroded by high commodity inflation. Yum also said China results were hurt by earthquake-related costs.

"I think investors are going to be asking with this strong sales growth in China and the U.S., why can't we get margins higher?" Russo said.

"Business conditions are tough for any restaurant company, even if you're a global company like this. It's tough everywhere," he said.

Yum, which is expecting a lower tax rate, more benefits from currency and lower-than-expected interest expense, boosted its 2008 earnings forecast by 2 cents to $1.89 per share excluding special items that would boost results by 6 cents per share. The new forecast matches analysts' consensus forecast compiled by Reuters Estimate.

Yum shares, which had finished up $1.01, or 2.9 percent, to close at $36.47 on the New York Stock Exchange fell 5.4 percent to $34.50 in extended trade.