LOUISVILLE, Ky. (AP) — Though it is craving a repeat of its 2010 performance, the owner of the Pizza Hut, Taco Bell and KFC chains is facing distasteful developments: inflation in China and a lawsuit challenging a staple ingredient at Taco Bell.
Yum Brands Inc. executives said on a conference call with investors Thursday that they're bracing for commodity and wage inflation in the company's fast-growing China operation, its most profitable. Yum recently raised prices there to help offset the higher costs.
Louisville-based Yum said it's confident of weathering the higher expenses in China, where it has more than 3,900 restaurants that have made KFC a leading fast-food brand internationally.
"I feel comfortable operating in that environment, even though it will keep us on our toes," Chief Financial Officer Rick Carucci said on the call.
Yum said its operating profit rose 26 percent last year in China, adjusted for currency fluctuations, and the company is on its way toward $1 billion in annual operating profit there.
"We continue to believe we're in the early innings ... of growth in China," Yum Chairman and CEO David C. Novak said during the conference call.
The company said it's also bracing for commodity inflation around the world in 2011.
Yum said Wednesday that in 2010 it earned $1.16 billion, or $2.38 per share, compared with $1.07 billion, or $2.22 per share, in 2009. Its revenue was $11.34 billion, up from $10.84 billion in 2009.
For 2011, analysts on average are expecting Yum to earn $2.83 per share on revenue of $11.77, according to FactSet.
Yum shares rose $1.50, or 3.14 percent, and closed at $49.23 Thursday.
Yum executives outlined their strategy for the coming year a day after the company said its fourth-quarter net income rose 27 percent with strong growth overseas and a rebound in the U.S.
Yum said its earnings per share rose 17 percent for the year, excluding one-time items, its best performance ever.
In the U.S., where the chain has struggled as recession-weary consumers have stayed home to eat more often, Taco Bell appears prime for expansion, Novak said. Its restaurant count here could grow to about 8,000 from the current 5,000, Novak said.
Taco Bell already accounts for about 60 percent of Yum's profits in the U.S. The chain is testing a breakfast menu and looking at offering higher-priced dinner items.
Novak hit back at a false-advertising lawsuit filed against Taco Bell over the meat in its tacos. He said the allegations that its taco filling doesn't have enough beef to merit the name are "absolutely false" but acknowledged the lawsuit has hurt the chain.
"Clearly we are seeing a negative, short-term impact," Novak said. "We believe we turned the tide with our aggressive response, and will wait and see the ultimate impact."
Taco Bell took out full-page ads in several major newspapers last week and launched a YouTube campaign featuring its president to proclaim its taco filling is 88 percent beef. The other 12 percent, the company says, contains a mixture of spices and common food additives.
The lawsuit, filed the week before in federal court in California, alleges the filling has binders and extenders and does not meet federal requirements to be labeled beef.