Yum sales surprise, up on strength in China

NEW YORK (Reuters) - KFC parent Yum Brands Inc posted higher-than-expected quarterly sales fueled by growth in China, its biggest profit driver, and its shares rose 6.4 percent after hours.

Yum, based in Louisville, Kentucky, has more than 3,700 restaurants, mostly KFC outlets, in China, the world's fastest-growing major economy. It is the No. 1 Western restaurant brand in China, with far more restaurants than rivals like McDonald's Corp and Starbucks Corp .

The company, which also owns the Pizza Hut and Taco Bell brands, said revenue from China rose 28 percent in the first quarter, with sales at existing restaurants up 13 percent. It also opened 92 new restaurants there.

The sales results overshadowed the impact of inflation. Food and paper costs in China rose 35 percent during the quarter and payroll and benefits were up 36 percent, Yum said.

"It's their fastest-growing, highest-margin market. So if that can continue to grow at accelerated rates, that's the story here," said Stacey Brodbar, an analyst at investment firm WP Stewart, which owns Yum shares among its $1.6 billion in assets under management.

Yum is widely regarded as one of the biggest China plays for investors in the U.S. stock market.

Yum's strength in China helped offset weaker performance in the United States, where same-store sales fell 1 percent after negative press about a lawsuit regarding the beef used at Taco Bell. The lawsuit was later dropped.

Yum's net income was $264 million, or 54 cents per share, in the first quarter, ended March 19, up from $241 million, or 50 cents per share, a year earlier.

Excluding special items, profit was 63 cents per share, missing by a penny analysts' average estimate, according to Thomson Reuters I/B/E/S, by a penny.

Revenue was $2.43 billion, compared to $2.35 billion a year earlier and analysts' estimates for $2.40 billion.

The company affirmed its previous 2011 earnings growth target of "at least 10 percent," excluding special items, which translated to $2.78 per share.

Yum said it expects inflation of 7 percent this year in China in the price of commodities such as chicken and cheese. It expects 6 percent commodity inflation in the United States.

Yum shares rose 6.4 percent to $54.86 after hours after closing at $51.55 on the New York Stock Exchange.

Rival fast-food chain Chipotle Mexican Grill Inc , whose restaurants are mostly in the slower-growing U.S. market, reported a decline in its quarterly operating margin due to higher food and advertising costs, and its shares fell 3 percent after hours.

Cheesecake Factory Inc , which operates sit-down restaurants, reported better-than-expected profit helped by sales of soft drinks and customers spending more per visit.

(Reporting by Martinne Geller; editing by Andre Grenon)