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Doritos taco eases Yum's China heartburn
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LOUISVILLE, Ky. (AP) — Yum Brands Inc. was spared more heartburn from a rare profit setback in China thanks in part to Taco Bell's new take on the taco.

The owner of the Taco Bell, Pizza Hut and KFC chains said Wednesday that its second-quarter net income grew by 5 percent. That gain came despite the sluggish performance in its key China business.

Yum said its operating profit sagged by 4 percent in China, when adjusted for currency fluctuations, as a result of commodity and labor inflation that squeezed restaurant profitability.

But it was the versatility of Yum's business that helped it weather the setback. Yum reported solid sales in other international markets, continued fast-paced restaurant openings overseas and supersized gains at its Taco Bell stores in the U.S.

"Not everything is going to be hitting all at one time," Edward Jones analyst Jack Russo said. "The U.S. (business) is much better this year. China has softened a little bit from pretty torrid rates. But that's the beauty of a portfolio."

Taco Bell had double-digit growth in sales at U.S. restaurants open at least a year, which the company attributed to strong sales for its new tacos featuring shells made out of Nacho Cheese Doritos. Taco Bell led continued sales momentum in Yum's U.S. business.

Yum said it expects a return to double-digit profit growth in the second half of the year in China, traditionally its most profitable division. The China business had strong sales growth in the second quarter, but inflation ate into profits.

The company also ramped up around-the-clock operations and delivery service at more KFC stores in China, another contributor to higher costs, said Jonathan Blum, a Yum senior vice president.

Yum recently raised prices for some menu items in China, which will be reflected in the second-half performance, Blum said.

The company also continued its fast expansion, opening 160 new stores in China in the quarter. Yum now has more than 3,900 KFC restaurants in China.

Yum said it expects record new-unit development reaching at least 700 stores this year in China. It forecasts a record 1,700 new international unit openings for the year.

A combination of strong sales at its existing overseas restaurants and the rapid pace of new store openings has been a proven recipe for profit growth at Louisville-based Yum.

Meanwhile, U.S. operating profit was up 26 percent in the quarter amid stronger sales at all three chains, led by Taco Bell. That follows a 27 percent jump in first-quarter operating profit growth.

In the second quarter, Taco Bell had a 13 percent increase in sales at U.S. restaurants open at least a year, as the chain capitalized on the popularity of its new Doritos Locos Tacos. The figure, an important measurement of restaurant performance because it leaves out stores that have recently opened or closed, rose 4 percent at Pizza Hut and 1 percent at KFC.

The company hopes the momentum will continue at Taco Bell.

Taco Bell this month rolled out a more upscale menu created by celebrity chef Lorena Garcia to go along with its inexpensive fare. In January, the chain started offering breakfast at nearly 800 restaurants mostly in the Western U.S. Taco Bell has said it hopes to go nationwide with its breakfast burritos, sausage and egg wraps and hash browns by the end of 2014.

Taco Bell accounts for about 60 percent of U.S. profit for Yum.

Operating profit in Yum's international division, which excludes China and India, rose 6 percent, adjusted for currency fluctuations. Yum opened 172 new restaurants in 45 countries during the quarter.

Yum reported net income of $331 million, or 69 cents per share, in the three months ended June 16. That's up from $316 million, or 65 cents per share, a year ago. Revenue rose 12 percent to nearly $3.2 billion.

Excluding one-time items, Yum's earnings were 67 cents per share.

Analysts had expected earnings of 70 cents per share on revenue of $3.12 billion, according to FactSet.

The Louisville-based company reaffirmed its full-year forecast of earnings-per-share growth of at least 12 percent, or at least $3.22, excluding special items.

Yum operates more than 37,000 restaurants in more than 110 countries and territories.