Yum Brands beats estimates as Taco Bell recovers from outbreak

Yum Brands reported third-quarter earnings that beat Wall Street estimates, but a cyclospora outbreak tied to Taco Bell lettuce weighed on same-store sales during the quarter, CNBC reported.

The parent company of KFC and Taco Bell earned $1.56 per share on an adjusted basis, above the $1.49 analysts expected. Revenue of $2.05 billion was in line with estimates. Net income was $1.62 billion, up from $397 million a year earlier, with the gain boosted by the completed divestiture of Pizza Hut.

Taco Bell’s same-store sales declined 4% in the quarter as diners pulled back after the foodborne illness outbreak. But the company said Taco Bell has rebounded, with same-store sales up about 1% in the fourth quarter so far and up 3% in the last four weeks.

The cyclospora recovery

The outbreak was the worst-case scenario for a restaurant chain: a food safety incident tied to a common ingredient, iceberg lettuce, that drove customers away. The weekend of July 18 saw the most severe impact, and the effects lingered through the third quarter.

Yum’s recovery strategy relied on loyalty. Taco Bell’s most loyal customers returned first, helped by weekly Tuesday deals for loyalty program members. Traffic from medium and light customers has bounced back to about 95% of prior levels, while visits from heavy users are back to normal, CFO Ranjith Roy said.

The company also leaned on star power. A collaboration with pop star Olivia Rodrigo on a pink-colored Mountain Dew Baja Blast generated attention and gave casual diners a reason to return. The combination of loyalty deals and celebrity marketing is the playbook for recovering from a brand crisis, and it appears to be working.

CEO Chris Turner said Taco Bell has been outpacing the quick-service restaurant industry on same-store sales growth since the end of September. The recovery is real, but the question is whether the customers who returned will stay, or whether the outbreak left a lasting impression on the casual diners who are still at 95% of prior levels.

The Pizza Hut divestiture

Yum completed its divestiture of Pizza Hut during the quarter, closing the sale of the China business to Yum China on Aug. 7 and the rest of Pizza Hut to LongRange Capital on Sept. 1. The move simplifies Yum’s portfolio to two major brands, Taco Bell and KFC, and allows management to focus on the chains with the best growth prospects.

Pizza Hut was the weakest of Yum’s three brands, and the divestiture removes a drag on the company’s results. The third-quarter numbers include Pizza Hut up until the sale dates, which complicates comparisons, but going forward Yum will report a cleaner two-brand portfolio.

The divestiture is a recognition that Yum could not fix Pizza Hut. The pizza delivery business has been under pressure from third-party delivery apps and from Domino’s, which dominates the category. Selling the chain was the right call, and the market responded positively to the simplification.

KFC’s U.S. problem

KFC’s same-store sales ticked up 1% globally, helped by growth in China and Europe. But the U.S. business is struggling. System sales shrank 6% in the quarter, and the U.S. is now KFC’s third-largest market.

KFC has faced a wave of new competitors in the U.S. chicken market, including Popeyes, Chick-fil-A, and rising fast-casual chains. Budget-conscious consumers have traded down, and KFC’s value proposition has not been strong enough to hold them.

The company launched popcorn chicken during the quarter, which sold out in many restaurants. But the limited-time item was not enough to offset the comparison against the successful Hot & Spicy Wings and Potato Wedges promotion from the year-ago period. KFC needs a sustained value message, not a one-time item.

Globally, KFC is a different story. The chain is growing in China and Europe, and Turner said the company wants to make KFC “the most modern chicken QSR” globally. The plan includes a new brand identity, upgraded sauces, and a wider menu with more beverages. The international growth is the bull case for KFC; the U.S. is the bear case.

What I think

The quarter is better than it looks. The earnings beat and the Taco Bell recovery are the real stories, and the cyclospora impact is fading. Taco Bell is Yum’s growth engine, and the fourth-quarter numbers showing same-store sales up 3% in the last four weeks suggest the brand is back. The recovery strategy worked.

The Pizza Hut divestiture is the strategic move that matters most. Yum is now a two-brand company, and that simplifies the story for investors. Taco Bell is the growth engine, KFC is the global cash cow, and management can focus on executing both. The complexity of managing three brands with different trajectories is gone.

KFC’s U.S. problem is the one that should worry investors. The chicken market in the U.S. is crowded, and KFC is losing share to competitors with better value propositions. The international growth is impressive, but the U.S. is still a symbolically important market, and a 6% decline in system sales is a bad number. The popcorn chicken sellout shows that the brand can generate demand with the right product, but one item is not a strategy.

The restaurant industry is in a difficult moment. Inflation has squeezed consumers, traffic is down across the category, and the companies that are winning are the ones with clear value messages and strong loyalty programs. Taco Bell has both, and the recovery from the outbreak proves it. KFC U.S. has neither, and the numbers show it.

The stock should respond to the earnings beat and the Taco Bell recovery, but the KFC U.S. decline is the overhang. Yum needs to fix its chicken business in its home market, or the global growth will be offset by domestic erosion. The quarter is a step in the right direction, but KFC U.S. is the unfinished work.