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Yum Brands Tops Estimates Despite Taco Bell Sales Decline

Fast-food company Yum Brands reported a 2.6% rise in quarterly earnings on Monday as a lower tax rate and strong profit growth in China offset fallout from an E. coli outbreak at some Taco Bell restaurants in the U.S..

Fourth-quarter net income for the parent of the KFC, Pizza Hut and Taco Bell chains increased to $232 million, or 83 cents per share, from $226 million, or 77 cents per share, a year ago. Analysts, on average, expected profit at 79 cents per share, according to Reuters Estimates.

The company's shares fell 0.5% in after-hours trading following the announcement. One analyst said that excluding the lower tax rate, earnings were below expectations in part because of higher-than-expected costs.

Operating profit at Yum, which owns or franchises more than 32,000 restaurants worldwide, fell 1 percent to $329 million. Higher restaurant closure and impairment costs in the United States and weak sales at Taco Bell contributed to the decline.

In a statement, Yum said net income benefited from a reversal of tax reserves. "The tax rate really helped earnings here," said RBC Capital Markets analyst Larry Miller, who has a "sector perform" rating on Yum shares. "Operating profit was a bit lower than what I was looking for."

Revenue rose 4% to $3.02 billion. Analysts expected about $2.89 billion, according to Reuters Estimates.

Taco Bell Weighs On U.S. Unit

In the U.S., sales at company-owned Yum restaurants open at least a year fell 2%, led by a drop of 5% at Taco Bell. Operating profit in that division fell 15%. More than 70 people fell sick late last year because of the E. coli outbreak linked to Taco Bell restaurants in the U.S. Northeast. Federal health officials said contaminated lettuce was the likely cause.

Yum said the low point of the Taco Bell sales decline occurred in late December and it added that sales at the chain have since recovered.

In Yum's fast-growing China business, sales rose 27%, and in international markets excluding China, sales were up 10 percent. Operating profits in those divisions rose 37% and 11%, respectively. Together, they nearly equaled the operating profit for the U.S. business.

For 2007, Yum forecast earnings of at least $3.21 per share. Analysts, on average, are expecting $3.22, according to Reuters Estimates.

Yum's businesses outside the U.S. -- including its robust KFC unit in China -- are the company's biggest growth vehicles and are expected to make up one-half of its operating profit this year.

UBS analyst David Palmer said in a note on Monday that Yum "has increasingly traded on the fortunes of its international businesses." Palmer has a "neutral" rating on the stock.

Yum shares were down 0.5% at $60.50 in extended trading after closing at $60.78 on the New York Stock Exchange. The stock has gained more than 3% since health officials declared the Taco Bell E.Coli outbreak over on Dec. 14.

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