Fast-food restaurant operator Yum Brands Inc. said Thursday that its domestic business remains in the doldrums as Taco Bell, its most profitable brand in the U.S., struggles to recover from publicity surrounding a dropped lawsuit over the beef content of its taco filling.
One day after the owner of Pizza Hut, KFC and Taco Bell reported a 10 percent rise in second-quarter profit, mainly driven by surging business in China, the company said it's bracing for another round of operating profit declines in the U.S.
Investors shrugged off those domestic struggles Thursday, bringing Yum's stock up 63 cents to $56.21 by mid-afternoon.
Louisville, Ky.,-based Yum generates nearly three-fourths of its operating profit from China and other foreign countries _which together host just under half of Yum's nearly 38,000 restaurants worldwide.
The company was upbeat about growth in those international markets, especially China. It raised its full-year earnings forecast Wednesday, another sign the overseas business is more than offsetting lackluster U.S. sales.
Yum said its second-quarter U.S. operating profit fell 28 percent as sales slumped at its three largest brands. Yum also operates Long John Silver and A&W restaurants and has put both those chains up for sale.
Chief Financial Officer Rick Carucci predicted another double-digit drop in U.S. operating profit for the current quarter, but the company said it expects things to get better in the fourth quarter.
Yum Chairman and CEO David C. Novak didn't offer sugarcoating.
"Our obviously very disappointing year-to-date U.S. results have frankly taken some of the luster away from what otherwise would be a great year," Novak said in a conference call with industry analysts.
The company's biggest concern is Taco Bell, which accounts for about 60 percent of Yum's U.S. profit. The Mexican-style chain has been reeling from publicity surrounding the lawsuit, which claimed that the filling in Taco Bell's tacos and burritos didn't contain enough beef to be called that.
Taco Bell called the accusations false and fought back with hard-hitting marketing on television and in newspapers. But the chain pegs the drop in its sales to the days after the suit and since then has struggled to win back customers.
"Frankly, the negative sales that resulted from the lawsuit has lasted longer than any one of us thought it would," Novak said.
High unemployment among young adults, Taco Bell's core consumers, also has hampered the brand's recovery, as have high fuel prices, he said.
Carucci said Thursday that Taco Bell, which saw revenue at restaurants open at least a year fall 5 percent for the quarter, indicated the figure is likely to fall again in the third quarter, though not as much. Novak was upbeat about long-term prospects, pointing to new menu items.
"As far as we're concerned, the meat issue is over," Novak said. "The economy is something we have to deal with. And we just need to be doing a better job building this brand going forward."
Janney Capital Markets analyst Mark Kalinowski remained upbeat about Yum's prospects. He said Yum's weak U.S. performance didn't seem to portend an industrywide slump.
"While these numbers are poor, we do not believe they are indicative of a worsening U.S. quick-service sector overall," he wrote in a note to investors. "Yum's shares will likely shrug off the domestic disappointment, given how robust China is."
Carucci said the company remains on track to open at least 500 restaurants in China this year.
Novak said its KFC business is "on a roll" in China, where nearly all 3,400 KFC stores offer breakfast and many have delivery service and stay open around the clock.
Yum also forecast continued solid growth in its international business outside China.