Value offerings propel growth for Yum! Brands

by Monica Watrous
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Pizza Hut $5 flavor menu, Yum! Brands
Pizza Hut's new $5 Flavor Menu helped drive system transactions in the quarter.

LOUISVILLE, KY. — Pizza Hut U.S. posted its best quarter in more than three years, with same-store sales up 5% in the three months ended March 19. Parent company Yum! Brands, Inc. said the pizza chain’s new $5 Flavor Menu helped drive system transactions. The promotion, launched in January, includes a selection of items for $5 each when customers order two or more.

Greg Creed, Yum! Brands
Greg Creed, c.e.o. of Yum! Brands

“Our discipline around making it easier to get a better pizza is holistic and driving traffic,” said Greg Creed, chief executive officer of Yum! Brands, during an April 21 earnings call with financial analysts. “We are focused on the entire customer experience from ordering, payment and delivery tracking to our assets and menu. And I believe this quarter’s results are further testament to our maniacal emphasis on this way of thinking.”

The company is on track to replace more than 1,300 ovens in its U.S. locations this year, which is expected to result in average energy savings of 25% in ongoing operational costs and a faster cook time, Mr. Creed said.

“From a marketing calendar perspective, we are focusing on balancing premium price innovation, such as Stuffed Garlic Knots Pizza, to protect and improve unit-level economics with compelling value offerings such as our ongoing $6.99 ANY pairs deal. All of this will enable us to provide our customers with a better pizza at great value.”

For the first quarter of fiscal 2016, Yum! Brands net income was $391 million, equal to 94c per share on the common stock, up 8% from $362 million, or 83c per share, for the prior-year period. Total revenues were $2,619 million, which were even with year-ago sales of $2,622 million.

Pizza Hut Stuffed Garlic Knots Pizza, Yum! Brands
Pizza Hut is focusing on balancing premium price innovation, such as the Stuffed Garlic Knots Pizza.

During the quarter, worldwide system sales increased 5%, worldwide same-store sales grew 2%, and worldwide core operating profit advanced 21%, driven by a rebound in China and same-store sales growth and operating profit growth in constant currency across all divisions.

Pizza Hut operating profit for the quarter was $87 million, up 7% on a reported basis from the prior year, and up 9%, excluding foreign currency exchange. System sales increased 1% on a reported basis and 4% in constant currency. Same-store sales were up 3%, reflecting strength in the United States and mixed results in international markets, as positive performance in Canada and Latin America partially was offset by weakness in Korea, Australia and India.

“The bottom line is that we have established solid momentum with our strategy in the U.S., especially around the $5 Flavor Menu,” Mr. Creed said. “And as we roll this overall strategy out internationally we hope to achieve similar success.”

KFC meal, Yum! Brands
KFC division operating profit was $160 million.

KFC division operating profit was $160 million, down 4% on a reported basis but up 4% in constant currency. System sales declined 2% on a reported basis but increased 5% excluding foreign currency translation. Same-store sales increased 1%.

Taco Bell operating profit increased 4% on a reported basis to $119 million, with system-sales up 3%, and same-store sales up 1%.

“While 1% same-store sales growth is not what we’re used to seeing at Taco Bell, the timing of our key launches had an impact on same-store sales growth for the quarter,” Mr. Creed said. “The Quesalupa, which launched in February, mixed at almost 10% and drove a meaningful lift in transactions. We also launched our $1 breakfast menu in March. The $1 price point is consistent with Taco Bell’s reputation as the value leader in Q.S.R.

“Taco Bell’s new breakfast $1 value menu differentiates itself from the competitors and puts it at the forefront of value in a growing daypart. We now have 10 $1 items on the breakfast menu and are seeing breakfast sales hold at 8% and transaction growth accelerating.”

Taco Bell Quesalupa, Yum! Brands
Taco Bell's Quesalupa drove a lift in transactions during the quarter.

Due to the better-than-expected performance, the company raised its guidance for full-year core operating profit growth to 12% from 10%.

“Even though it is still early in the year, we are confident about the revised guidance and will update you as the year progresses,” Mr. Creed said.

Additionally, Yum! Brands said it is on track to complete the separation of its China business by the end of the year.  
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