Yum touts 2009 menu makeovers as U.S. operating profits plummet

LOUISVILLE KY. Yum! Brands Inc., following its disclosure of a 15.5-percent drop in third-quarter U.S. operating profit, has predicted solid overall earnings growth for 2009, including gains by lagging KFC from its upcoming rollout of Kentucky Grilled Chicken. —Foodservice behemoth

David Novak, Yum’s chairman and chief executive, also told stock analysts in a conference call this month that the company’s other brands intend to expand on successful product introductions, including new varieties of Taco Bell’s new Frutista Freeze beverages and more choices from Pizza Hut’s hot-selling Tuscani delivered-pasta line. —Foodservice behemoth

Seeking to show that Yum’s globally derived 4.4-percent increase in net profit for the Sept. 6-ended quarter might be a trend that could spread to its struggling domestic operations, Novak described a range of other menu marketing initiatives that could boost U.S. system performance. —Foodservice behemoth

Taco Bell’s recent launch of the smoothielike Frutista Freeze drinks was “an unqualified success,” and the frozen-beverage platform would help the chain snag more afternoon snack traffic and break into the dessert category, Novak predicted. —Foodservice behemoth

Debuted in May in two flavors, strawberry and strawberry-mango, the Frutista Freeze line is adding the Triple Berries ’n Crème, Strawberries ’n Crème and Mango ’n Crème varieties. —Foodservice behemoth

Novak said Pizza Hut has rung up $500 million in Tuscani sales since it began offering delivery of two varieties of the 2-pound, family-size items earlier this year, and “has a whole line of different kinds of pastas” that it will introduce over the next two years. He did not disclose specifics. —Foodservice behemoth

KFC, whose U.S. same-store sales fell 4 percent in the third quarter, expects a reversal from the Kentucky Grilled Chicken launch, and the chain’s upcoming rollout of a new cookie dessert platform, Novak revealed. —Foodservice behemoth

Just days before Yum’s briefing of analysts, as the company vowed to post calorie counts on its menu boards nationwide and lobby Congress for a menu-labeling mandate with no exemptions, Yum outlined other “better for you” marketing initiatives by its chains. —Foodservice behemoth

Yum said the Long John Silver’s chain this month was augmenting its fried-fish menu by introducing “Freshside Grille” items, including grilled shrimp, salmon and tilapia. —Foodservice behemoth

Following Pizza Hut’s current Fit ‘N Delicious lower-fat offering, the chain in December will debut “The Natural,” with a multigrain crust and all-natural toppings. Meanwhile, Taco Bell continues to feature its Fresco Menu of nine items with 9 grams of fat or less and fewer calories. —Foodservice behemoth

In connection with the calorie-posting pledge and other nutrition-oriented initiatives, Yum also disclosed a new policy of not advertising on TV shows aimed at children younger than 12 years old. —Foodservice behemoth

For the third quarter, Yum’s chains worldwide produced a 10.6-percent jump in corporate revenue to $2.84 billion on strong international business, especially in China, Yum said. —Foodservice behemoth

However, the steep fall in U.S. operating profit reflected thinner margins and a reduced store count. Yum forecast that full-year U.S. profit would be off about 8 percent from the prior annual result because of higher commodity costs and the depressed economy. —Foodservice behemoth

Systemwide U.S. same-store sales rose 3 percent for the third quarter, with Yum-owned branches posting a blended 4-percent rise, led by Taco Bell’s 8-percent gain and Pizza Hut’s 6-percent same-store rise, but offset by the 4-percent dip at KFC. —Foodservice behemoth

Third-quarter net income was $282 million, or 58 cents per share, versus $270 million, or 50 cents a share, a year earlier. Yum’s per-share earnings beat analysts’ average forecast of 54 cents, according to Thomson Financial. —Foodservice behemoth

While maintaining an upbeat tone, Novak acknowledged the economic conditions suppressing some results, especially for Yum’s U.S. system. —Foodservice behemoth

“We are well-positioned with powerful brands,” he said, adding that the company “would like to operate in better economies, but we can survive in most any economy.” —Foodservice behemoth

Explaining hopes for improvement at U.S. KFCs, Novak said the chain’s new seven-piece fried-chicken meal for $9.99 would successfully challenge supermarket meal offerings. He added that KFC soon will promote the cookie platform, which it has been testing “for a couple of years.” —Foodservice behemoth

He said, “KFC is taking steps to get us set up for a much better year next year,” and noted that the chain’s new president, Roger Eaton, formerly with the Australia division, is leading those efforts. —Foodservice behemoth

Despite the profit falloff, “I feel very good about the U.S. business,” Novak said. “Taco Bell and Pizza Hut have improved their leadership positions.” —Foodservice behemoth

Gross margins did not suffer after Taco Bell’s recent “Why Pay More?” promotion of items as low as 89 cents because most customers buy additional higher-margin items simultaneously, such as the Frutista Freeze, Novak said. —Foodservice behemoth

On the horizon for Taco Bell are new afternoon snacks and desserts, as well as a plan to better leverage dinner with the Fresco Menu, Novak said. Pizza Hut’s goal, Novak said, is to make pasta as big a seller as pizza, as well as to continue to grow Wing Street, which will launch national advertising by the end of 2009. —Foodservice behemoth

“Franchisees are very excited about Wing Street,” he said, citing the relatively low investment cost of $40,000 to $70,000 needed to add the chicken-wing component to existing Pizza Hut outlets. —Foodservice behemoth

Worldwide, same-store sales also rose 3 percent, with gains of 5 percent in mainland China and 4 percent everywhere else abroad. While operating profit in China rose about 19 percent, margins there fell 2.3 percent because of labor and food inflation, especially for chicken, said Yum, whose KFC and Pizza Hut operations constitute China’s largest restaurant chain. —Foodservice behemoth

Yum has not seen any economy-related fallout in its overseas business, except that China’s devastating earthquake last May and hosting of the Olympics in August drew some customers away from restaurants to their TVs, resulting in a 1-percent sales drop, chief financial officer Rick Carucci said. —Foodservice behemoth

Even though China’s quarterly 8-percent rise in same-store sales was below historic double-digit increases, “China will still be the fastest-growing economy in the world,” Novak said. “Our growth model for China has always been development-driven.” —Foodservice behemoth

Yum said it remains on track for its 20-percent growth target in China this year and next which would bring its system there to about 3,000 units in 500 cities. It opened 123 new mainland China units in the latest quarter, compared with 48 in last year’s third quarter, officials said. —Foodservice behemoth

Commodity inflation, especially for chicken, has hit Yum and KFC hard, especially in China and U.S. markets. CFO Carucci said commodity costs mushroomed by $32 million in the third quarter and that this year’s expected record $120 million in commodity inflation would be more than twice earlier expectations. —Foodservice behemoth

Touching on the credit crunch, Novak said he does not expect Yum’s planned sales of 500 U.S. restaurants per year to franchisees to be affected by any financing gaps. So far this year, 400 corporate outlets have been refranchised, but closing such deals is taking longer than usual, the CEO conceded. —Foodservice behemoth

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