Yum! Brands Beats Earnings Estimates, Cyclospora Outbreak Poses Threat

Yum Brands (YUM) reported adjusted earnings per share of $1.62 for the quarter ended June 30, four cents ahead of the $1.58 consensus, while net revenue climbed 12% to $2.17 billion, just short of the roughly $2.2 billion analysts expected.

The results predate the cyclospora outbreak that has since become the bigger story: Taco Bell grew same-store sales 7% and US system sales 9% during the quarter, KFC added 2% same-store sales with 6% system-sales growth in China, and Pizza Hut's same-store sales slipped 1%, for company-wide comparable sales growth of 3%.

Health regulators traced a cyclospora outbreak to iceberg lettuce at Taco Bell in mid-July, after the quarter had already closed. Foot traffic at Taco Bell locations has since fallen by double digits in percentage terms, and Taco Bell sales dropped roughly 2% from June 30 through July 27 as the outbreak became public, eating into the brand's strong quarterly momentum.

Net income surged 128% to $853 million, or $3.08 per diluted share, up from $374 million a year earlier, helped in large part by accounting tied to Yum's pending $2.7 billion sale of Pizza Hut, split between a $1.5 billion deal with LongRange Capital for operations outside mainland China and a $1.2 billion deal with Yum China for the mainland China business. The sale still needs regulatory approval and is expected to close in the third quarter; once it does, Yum is set to operate only Taco Bell and KFC, concentrating the company's brand mix, and its risk, more tightly around whichever chain is under pressure at any given time.

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