Yum Brands executives hint at possible KFC store closings to make US operation more profitable

KFC leaders hint some restaurants could close

LOUISVILLE, Ky. — Top executives with the owner of KFC hinted Wednesday that some U.S. outlets of the ubiquitous chicken chain could close if that’s what it takes to make it more profitable overall.

“I’d rather have 4,500 great-looking KFCs than 5,000 with 500 looking at being drive-by assets,” Yum Brands Inc. Chairman and CEO David C. Novak said during a conference call with industry analysts.

“We are totally prepared to do whatever it takes to get this system to look like a leader, be a leader and get where we need to go. And it will take time. But make no mistake about it, we are totally committed to doing that.”

KFC’s second-quarter revenue at U.S. restaurants open at least a year fell 7 percent. The chain had 5,040 restaurants at the end of the quarter — 4,187 owned by franchisees and 853 by the company.

It’s been a tale of two continents: In China, the chain is highly profitable and has become a dominant fast-food brand. Yum’s operating profit in the world’s most populous country rose 33 percent for the second quarter, driven mostly by KFC sales as it opened 59 new restaurants in China.

But Yum said higher commodity and labor costs in China in the second half of this year could dampen its profit there.

Chief Financial Officer Rick Carucci projected the company’s commodity costs will rise by about $15 million in the second half; they fell about $30 million in the first six months of the fiscal year. Labor costs are expected to escalate by about $32 million in the second half, compared with an upswing of about $12 million in the first six months.

The China division’s operating profit grew 35 percent for the first six months of 2010.

Back home, the Louisville-based chain known for selling fried chicken by the bucket rolled out Kentucky Grilled Chicken last year to win back health-conscious customers. The rollout, with an advertising blitz and a promotion on Oprah Winfrey’s Web site, led to a sales surge a year ago. But the chain hasn’t been able to sustain the momentum, even with the April introduction of the Double Down bun-less fried chicken sandwich.

Novak predicted U.S. sales for KFC will be sluggish for the rest of 2010. But he endorsed the chain’s leadership team and said its focus will be on improving operations, offering value options and pushing grilled chicken.

“There is no quick fix,” he said.

Yum’s shares were down 59 cents, or 1.4 percent, at $40.91 in trading Wednesday afternoon.

Novak said the company remains committed to its U.S. operations and noted that it helped franchisees pay for new ovens to prepare the grilled chicken.

“I think this shows how committed we are to growing the business here in the U.S.,” he said.

But Carucci said the chain and its franchisees will face additional costs in the future.

“To the extent that people are unable to do that, that could lead to closures,” he said.

Novak said that check prices remain a challenge for KFC.

“When you have pricing that gets into that casual-dining arena, or close to it, there aren’t too many concepts that are growing robustly today,” he said. “So our value proposition is a major challenge for us as we go forward.”

Yum’s other major fast-food brands — Pizza Hut and Taco Bell — do tend to be less expensive. And both did better in the second quarter than KFC.

KFC’s U.S. operations account for less than 10 percent of Yum’s profit in the U.S. and less than 3 percent of overall profit.

The company has more than 37,000 restaurants around the world.

Yum said Tuesday that its second-quarter profit fell slightly compared with a quarter a year ago with a large one-time gain.

But it raised its forecast for full-year earnings to $2.43 from $2.39. Analysts were expecting $2.42.