Yum Brands Inc. executives said Thursday that Taco Bell, their most profitable U.S. chain, hasn't recovered from the impact of a lawsuit, since dropped, over the beef content of its taco filling.
But the setback didn't spoil Wall Street's view of the fast-food company, which also owns the KFC, Pizza Hut, A&W and Long John Silver chains.
Yum's shares rose 4 percent Thursday, the day after it said its first-quarter profit surged in China and its overall profit rose 10 percent.
Yum also posted solid growth elsewhere overseas, fueled partly by expansion, especially in emerging markets. But Yum's performance varied widely by geography.
The biggest drag was in the U.S., where Taco Bell accounts for about 60 percent of Yum's profit. The company's operating profit fell 13 percent here.
Chief Financial Officer Rick Carucci said Taco Bell hasn't fully recovered from a sales slump after the widely publicized lawsuit was filed in mid-January questioning its taco and burrito filling. The Alabama-based lawyers who filed the lawsuit dropped it this week.
Taco Bell says it made no changes to its product, ingredients or advertising, no money was exchanged and no settlement agreement was involved. But the impact remains.
"We have not yet been able to reverse the negative sales trends at Taco Bell," Carucci said in a conference call with industry analysts. "If anything, sales have gotten a little bit weaker since the end of the quarter, and it is difficult to predict exactly when we will break this trend."
Carucci also said Yum's U.S. business faces a challenging year with fuel and commodity prices high and value-conscious consumers trying to rebound from the recession. He said the second quarter will be 2011's "low point" for Yum in the U.S.
"Clearly, the key to our improvement in the U.S. relies heavily on our ability to turn around sales trends at Taco Bell," he said.
Chairman and CEO David C. Novak said fallout from the suit has "lingered longer than we anticipated." But he said _ without offering specifics _ that Taco Bell is "working on other solutions" to generate a sales rebound.
Novak called the lawsuit an "absolute outrage" and said the lawyers involved "picked the wrong corporate pocket."
"It's unfortunate when you've got to waste a bunch of time dealing with lawyers when you should be focused 1,000 percent on the customer," he said in frustration.
Taco Bell hasn't lost its most loyal customers, he said; just the chain's occasional customers are staying away for now.
"We're optimistic that we will be able to get the business turned around, but we've got some work to do," Novak said.
Taco Bell fought back with hard-hitting marketing, including full-page ads in several newspapers Wednesday asking the law firm: "Would it kill you to say you're sorry?"
First-quarter revenue at U.S. restaurants open at least a year was flat at Taco Bell, up 1 percent at KFC and down 3 percent at Pizza Hut.
Revenue at stores open at least a year rose 13 percent in China during the quarter. The comparison is an important indicator of retailers' and restaurant companies' long-term financial health because it excludes locations that recently opened or closed.
Meanwhile, Yum's China business posted 18 percent operating profit growth, adjusted for currency fluctuations.
Janney Capital Markets analyst Mark Kalinowski remained upbeat about Yum's prospects due to its international growth potential. He noted that international businesses account for about 65 percent of Yum's operating profits, a figure he expects to grow.
Yum fell short of Wall Street's earnings-per-share projections for the first quarter, but the market was willing to shrug it off because of the company's "phenomenal" performance in China, he said.
"Clearly, investors appear willing to overlook the one-cent EPS miss in the face of such outstanding same-store sales in Yum's most important market," Kalinowski wrote in a note to investors.
Yum's shares rose $2.10 to close Thursday at $53.65.