Yum Brands Inc., owner of the Pizza Hut, Taco Bell and KFC fast-food brands, said Wednesday that its first-quarter profit rose 10 percent as growth in its China operations more than offset sluggish performance in the U.S.
The company's Taco Bell chain began the period with momentum in the U.S., but it suffered a "significant reversal" _ a 2 percent sales drop _ after a lawsuit was filed in mid-January claiming the filling in its tacos and burritos didn't contain enough beef to be called that, Yum said.
Taco Bell said the accusations were false, and lawyers pushing the lawsuit dropped it this week.
Yum said the quarter's sales at U.S. restaurants open at least a year were flat at Taco Bell, up 1 percent at KFC and down 3 percent at Pizza Hut.
Yum said the "near-term weak sales" at Taco Bell, combined with rising food prices, will make the second quarter the company's most challenging of the year in the U.S.
"We knew commodity inflation would be a headwind but did not plan for a significant reversal in sales trends at Taco Bell due to false claims made about our food quality that resulted in negative publicity," Yum Chairman and CEO David C. Novak said in a statement.
Novak said he remains "bullish" about long-term growth prospects at Taco Bell, whose 5,600 U.S. restaurants account for about 60 percent of Yum's profit in the U.S.
The chain is testing a breakfast menu and considering offering higher-priced dinner items.
Meanwhile, Yum said it remains confident its earnings per share will rise at least 10 percent for the full year, excluding one-time items. Analysts on average expect adjusted earnings of $2.85 per share, a rise of more than 12 percent.
The company kept up its rapid expansion during the quarter, opening 223 new restaurants, including 92 in China. Restaurant growth overseas has been a key driver for Yum's profit growth.
Its shares closed Wednesday at $51.55, up 66 cents, and rose another $3.31, or 6.4 percent, after hours.
Edward Jones analyst Jack Russo said the market was responding favorably to Yum's strong showing in China.
"I think the real surprise was China's same-store sales were well above expectations," he said.
Revenue at stores open at least a year rose 13 percent in China during the quarter, the company said. The comparison is an important indicator for retailers and restaurant companies because it excludes locations that recently opened or closed.
Louisville-based Yum reported net income of $264 million, or 54 cents per share, for the period that ended March 19. That's up from $241 million, or 50 cents per share, in last year's first quarter.
Its quarterly revenue was $2.43 billion, up from $2.35 billion.
Yum reported a non-cash, pre-tax charge of $66 million related to its decision to put its Long John Silver's and A&W restaurant chains up for sale so it can focus on its growing international business. That one-time charge amounted to 9 cents per share.
Analysts expected 64 cents per share and revenue of $2.4 billion, according to FactSet.
Operating profit in Yum's fast-growing China operations grew 18 percent, adjusted for currency fluctuations. The growth was partly attributed to expanding delivery and 24-hour operations at KFC.
"Our China business continues to fire on all cylinders," Novak said.
In Yum's international division, which doesn't include China, operating profit rose 8 percent, also adjusted for currency fluctuations. Yum opened 131 new units in the division, including 90 in emerging markets. The company said weak performances for Pizza Hut in the United Kingdom and KFC in Australia partly offset the division's overall profit growth.
Its U.S. operating profit fell 13 percent. Yum said it expects food inflation of about 6 percent for the year.
At Pizza Hut, sales at restaurants open at least a year fell 3 percent for the quarter. The figure rose 1 percent at KFC in the U.S.
Yum operates nearly 38,000 restaurants in more than 110 countries and territories, including more than 15,000 KFC outlets around the world.