Yum Vows To 'Slug It Out' In Recession

NEW YORK - Yum Brands Inc. (YUM) vows to "slug it out" with competitors in 2009 after reporting a 14% dip in first-quarter profit amid a decline in U.S. sales from increasing pricing competition and slumping dinner sales for its KFC and Pizza Hut brands.

Yum's international divisions produced stronger results than did the U.S., with same-store sales gains in both China, where it is pinning hopes for growth despite a slowdown in the economy there, and other international markets.

Effective cost management across all three divisions and deflating commodity costs helped the world's largest fast-food chain, with more than 36,000 restaurants, top analyst first-quarter estimates with per-share earnings of 48 cents, excluding special items, compared with expectations of 40 cents a share, according to Thomson Reuters.

The quarter also gave greater certainty to analysts that the company can hit its full-year goal of growing per-share earnings without special items 10%, sending shares up $2.33, or 7.3% in recent trading, to $34.42.

That growth is expected to be back-half loaded as sales, costs and foreign- exchange rate comparisons make it easier to lap the prior-year periods. Yum expects the current quarter to be the toughest of the year due to a low tax rate and record sales growth in China for the year-ago period.

"This is a slug it out year," Chief Executive David Novak said on an earnings call. "You got to take your gloves off, slug it out, take on competition, keep building your brands and be strong as you go into 2010."

That's not a write-off for 2009, as Yum is launching initiatives to both drive sales in addition to managing costs. It will especially look to focus on rejuvenating sales in the U.S., its largest and more mature market, where same- store sales fell 2%, compared with gains of 2% in China and 6% in other international markets.

Yum's sales during dinner are taking a huge blow as families, eager to save money, cook more meals at home. That is taking its toll at both KFC and Pizza Hut, which derive a majority of their sales during the dinner hours.

KFC's new grilled chicken platform was recently launched to drive more sales at the lagging brand, while Pizza Hut is relying on more sales of pasta, lasagna and chicken wings, as it tries to become more than a pizza chain.

Taco Bell, the top performing brand, which contributes 60% to U.S. profits, is seeing more competition from other fast-food chains pushing their value menus harder as they try to attract customers, and plans to fortify its own "Why Pay More" value menu in response.

International markets remain in better shape, even as the economic slowdown spreads worldwide. KFC's same-store sales in India, for instance, were up more than 30% in the quarter, and Yum plans its first Taco Bell locations there later this year. The company is also continuing to rapidly open units in China.

Fast-food chains have been more resilient in the economic slowdown than casual-dining restaurants due to their lower-priced food and convenience. But the higher-priced chains are cutting prices to win back customers, leading some to believe that the quick-service industry may resort to a "zero sum industry" highlighted by intense competition for fixed pool of customers.

(Dow Jones)