Taco Bell, KFC and Pizza Hut parent Yum! Brands, Inc. (NYSE:YUM) reported second-quarter earnings Wednesday after the market closed. The figures showed that the firm beat market expectations, which sent the stock up nearly 5% in after-hours trading (it’s now up 3.5% in early morning trading).
YUM stock has struggled over the past year as poor economic conditions in China and a challenging fast-food environment in the U.S. weighed on its bottom line.
Competition, difficulty incorporating local cuisine and food safety scandals all made it difficult for the firm to retain customers. Wednesday’s earnings report, however, signaled good news about the firm’s China arm, due to be spun off in October.
YUM Stock Earnings Rundown
Same-store sales at KFC locations in China rose 3%, although Pizza Hut locations posted an 11% decline. Better sales in China coupled with share repurchases contributed to the firm’s 75 cent per-share earnings this quarter, a 9% increase from last year’s EPS.
The China figures also gave CEO Greg Creed reason to up his guidance on full year operating profit from 12% to 14%.
Yum Brands also confirmed that it is still planning to spin off its China business in October and that much of the capital resulting from the split will be returned to shareholders.
This is good news for investors, as it will bring the valuation of that segment higher. However, with U.S. sales still struggling, it remains to be seen whether the company can compete with burger chains and fresh fast-food options like Chipotle Mexican Grill, Inc. (NYSE:CMG).
What About Taco Bell?
Taco Bell, however, didn’t fare as well, Yum Brands’ Mexican chain reported a 1% drop in sales across its more than 6,000 U.S. locations.
This is the second quarter in a row that Taco Bell’s sales have declined, a sign that YUM is likely to continue struggling with shifting fast-food preferences in the U.S. These challenges were largely behind the firm’s revenue miss of just $3.01 billion, with total sales falling 3% from last year.
All told, YUM stock has made it’s way back into investors’ good books following a better-than-expected earnings release, but the company’s overall structure is still questionable.
Non-burger fast-food chains are struggling in the U.S., and YUM’s efforts to overcome this obstacle have proven futile. Taco Bell’s breakfast menu has done very little to entice customers to revisit the Mexican chain, and Pizza Hut’s $5 menu has become dated.
Selling off the China arm will give the company a stronger position in Asia, but without knowing the details of the transaction, it’s difficult to say whether or not it will give YUM any momentum toward a brighter future in the US.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
