KFC parent Yum Brands Inc reported quarterly profit that missed Wall Street's view as inflation in China cut into margins in there, its top market.
Rising food and wage costs as well as expenses related to extending operating hours and building new restaurants in China have cut into margins for the company, Yum spokesman Jonathan Blum told Reuters.
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Louisville, Kentucky-based Yum is the biggest Western restaurant operator in China and is widely viewed as a way for U.S. investors to bet on that country.
The company has been raising prices in China to offset higher costs but that hasn't appeared to hurt demand as traffic rose in the quarter.
The company's 10 percent gain in sales at established restaurants in China topped analysts' average call for a rise of 9.2 percent, according to Consensus Metrix.
China accounts for more than 40 percent of the profit at Yum, which has more than 3,900 KFC shops and almost 700 Pizza Hut restaurants there.
Net income for the second quarter, ended June 16, rose to $331 million, or 69 cents per share, compared with $316 million, or 65 cents per share, a year earlier.
Excluding a gain of 2 cents, the company earned 67 cent per share in the latest quarter, missing analysts average estimate by 3 cents per share, according to Thomson Reuters I/B/E/S.
Yum said its worldwide restaurant margin fell 0.6 percentage points to 15.2 percent during the second quarter, including declines of 4.1 percentage points in China and 1.1 percentage points at its unit that includes other international markets such as Japan, Russia and France.
Restaurant margin increased 5.8 percentage points in the United States, where new menu items have boosted sales at Taco Bell, its Mexican-style fast-food chain that accounts for about 60 percent of domestic operating profit.
Shares in Yum fell 1.5 percent to $64.54 in extended trading on Wednesday.