Yum Shares Surge on Strong Earnings Report

By Brian Shactman and Andrew Fisher

Yum! Brands got the third-quarter earnings season off to a strong start after the closing bell Monday, posting earnings of 50 cents per share, topping analysts' expectations by five cents.

A Taco Bell fast-food restaurant in Somerset County, New Jersey.
Mike Derer

Revenues increased to $2.56 billion from $2.44 billion during the same quarter a year ago.

Shares of Yum! climbed 5.6 percent Monday after the market and gained another 4.5 percent in premarket trading Tuesday.  CEO David Novak said the earnings results reflected the company's global strength.

"This is becoming a global brand company, with better consistency, better returns, and more international growth, particularly in China, than any other company in the S&P 500." Novak said, pointing out that his company is opening restaurants in China at a rate of better than one per day. "We're the No. 1 global retail developer in the world today, ahead of McDonald's, Starbucks, Wal-Mart, Home Depot."

The name is only 5 years old, but Yum! is actually celebrating a decade in business. As of the end of last year, the company operated approximately 34,000 restaurants in 100 countries and territories.

KFC, Pizza Hut and Taco Bell were parts of Pepsico until October 1997, when the food and drink conglomerate spun off its restaurant business, and saw its quarterly profits immediately jump 43 percent. Under the banner of Tricon Global, the company stumbled. The company got into an expensive lawsuit over the creation of Taco Bell's chihuahua mascot. KFC had to recall nearly a half-million toys that had been packaged with children's meals.

In 2002, its pension plan was underfunded by a hundred million dollars, and its stock was selling for ten dollars a share.

Yum Brands CEO

That was when Novak took over as CEO.

"I always looked at it back then as an opportunity to do what I called 'the gigantic do-over,'" Novak said.

Part of the "do-over" involved winning over Wall Street. In what may have been homage to Wall Street, the company was re-named after its stock symbol, YUM. Another element was the bundling of its brands at indiviudual retail units. Long John Silver's and A&W were added to the bundles. Earnings started -- and have continued -- to grow in double digits each year.

David Palmer, senior restaurant analyst for UBS, finds Yum! a good investment.

"You're going to be well served buying Yum! today, because this is one of the few businesses that is going to be better in three years," Palmer said.

Sam Su is president of Yum! Restaurants China. He's been running the company's operations there for 10 years, and he says it's come a long way.

Yum! Q3 Earnings

"Our crew had no idea how to serve customers, how to prepare food," he said. "We had to teach everybody everything. We had to build a supply chain. We had to build logistic capability."

Sam Su continues to build. His company is pioneering a home-grown concept restaurant called East Dawning, offering authentic, quick-serve Chinese food. Yum! says East Dawning may well become a bigger brand in China than KFC.

Yum! shares are up about 30 percent from a year ago.