Taco Bell remains a bright spot for Yum Brands. Photo: The Motley Fool
Fast-food giant Yum! Brands reported better-than-expected second-quarter earnings on Tuesday. But with the stock down about 4% from its pre-earnings level, the announcement appears to have left a bad taste in investors' mouths.
On one hand, Yum! Brands' adjusted net income per share fell 5% year over year, to $0.69, which was still well ahead of analysts' expectations for earnings of $0.63 per share. On the other hand, however, Yum! Brands' total revenue fell 3.2% over the same period, to roughly $3.1 billion, slightly below Wall Street's estimate for revenue of $3.19 billion.
To get a better idea of what's driving those results, I spoke over the phone with Jonathan Blum, Yum! Brands' senior vice president and chief of public affairs. "The best summarization of our quarter," said Blum, "is that we're making continued progress in China, Taco Bell is going from strength to strength, KFC is building on its momentum, and Pizza Hut is still in turnaround mode."
Of course, that's a loaded answer that came at the end of our call. So let's take Blum's summary point by point.
First, Yum!'s China Division system sales fell 4% year over year, helped by 7% unit growth, offset by a 10% decrease in same-store sales. As Blum pointed out, however, that's a sequential improvement over last quarter's 12% same-store sales plunge, and came despite a significantly harder year-over-year comparison.
Almost exactly one year ago, Yum! reported China division system sales rose 21% year over year, bolstered by 7% unit growth and impressive 15% same-store sales growth. It wasn't until two months later, in September of last year, that KFC and Pizza Hut began to struggle in China , thanks to adverse publicity following a report of improper food handling practices at Shanghai Husi, one of the company's minor -- and now former -- suppliers. China Division restaurant margin fell 2.2 percentage points, to 14.6% in Q2; but again that's not a huge concern given the typical seasonality and difficult year-ago comparison.
Second, when I spoke with Blum three months ago, Taco Bell was a bright spot in the first quarter after revenue jumped 9% driven by 3% unit growth and 6% same-store sales growth. This quarter was no different, as Taco Bell Division system sales rose 9%, helped by the exact same combination of unit and same-store sales growth. In addition, Blum noted that initial tests for Taco Bell's Door Dash delivery program are "going very strong," which bodes well for its possible expansion down the road.
Blum also credited much of the performance to Taco Bell's breakfast daypart, which is performing "very well," and already represents around 7% of the chain's total sales. For perspective, McDonald's management recently stated that breakfast at the Golden Arches comprises around 25% of total sales.
Considering Taco Bell just launched breakfast nationwide in March 2014, that leaves considerable room for further growth and encroachment on McDonald's favorite early daypart. For now, the Taco Bell division already boasts the most impressive operating margin in the company, at 29.5%, which led to a 29% increase in operating profit.
Next, KFC outside of China continued to make progress, with system sales up 6%, driven by 2% unit growth and 3% same-store sales growth. KFC opened 122 international locations in 39 countries, with roughly three-quarters of those in emerging markets. Meanwhile, KFC's operating margin remained steady sequentially, at 21.9%, leading to a 10% year-over-year increase in operating profit.
Finally, Blum conceded, "Pizza Hut is a turnaround story, and there's more progress that needs to be made there." That's a fair admission. Pizza Hut Division system sales rose a modest 1% in the second quarter, driven entirely by 2% unit growth and flat same-store sales despite ongoing efforts to promote the chain's recently overhauled menu and brand image.
The good news? Similar to last quarter, consumers are still responding well to Pizza Hut's new menu offerings, with high repurchase intent. But once again, many consumers have opted to stick with what they know, and haven't tried the new menu offerings. As it stands, Blum says, "We recognize we have more work to do" before Pizza Hut's turnaround is complete.
That's not to say that this week's share price decline is a symptom of broader discontent among investors. After all, Yum! Brands stock is still up more than 20% so far in 2015, handily outpacing the S&P 500's 2% climb during the same period. Given the progress Yum! has demonstrated so far with its core brands (aside from Pizza Hut's mediocre showing), I wouldn't be the least bit surprised if Yum! Brands' stock resumes its longer upward trend from here.
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The article Exclusive: Yum! Brands, Inc. SVP Jonathan Blum on KFC's Progress, Taco Bell's Strength originally appeared on Fool.com.
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