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Yum Brands shares rally on raised earnings forecast

A KFC restaurant in Shanghai.
Johannes Eisele | AFP | Getty Images
A KFC restaurant in Shanghai.

Shares of Yum Brand rose as much as 5 percent on Thursday after improved results in China helped the company outpace earnings expectations and boost its forecast.

The company reported late Wednesday adjusted earnings of 75 cents per share on revenue of $3.01 billion, which surpassed Wall Street expectations of 74 cents per share, according to Thomson Reuters. Analysts, on average, had called for revenue of $3.09 billion.

Shares closed nearly 3 percent higher on Thursday.

"Given our strong first-half results and current trends in China, I'm pleased to raise our full-year core operating profit growth forecast to at least 14 percent from 12 percent previously," Greg Creed, CEO of Yum Brands, said in a statement.

Yum reaps more operating profit from China than any other division, but the company plans to spin it off in late October. The company reiterated that the spinoff remains on track.

China, Yum's largest division in terms of revenue, garnered $1.59 billion in revenue during the second quarter. China KFC restaurants posted a 3 percent rise in same-store sales, while the smaller and more upscale Pizza Hut Casual Dining chain saw same-store sales drop 11 percent.

However, management expects improved performance in the fiscal third quarter, saying the China division is "off to a good start." Pizza Hut Casual has seen positive same-store sales in recent weeks.

Mark Kalinowski, an analyst with Nomura, raised his target price for the company following Wednesday's earnings report.

"Given the resumption of positive same-store sales momentum in China in [the third quarter], the encouraging words about the timing of the China spinoff, and the company's raised 2016 core operating profit target, we modestly raise our target price on Yum by $1, to $96," he said.

However, Neil Saunders, CEO of Conlumino, said that while China has traditionally been an "engine of growth" for the company, its modest 3 percent sales growth was a "disappointing outcome."

"This is especially so for the Casual Dining division, which includes Pizza Hut, where same-restaurant sales dropped by 11 percent," Saunders said in a statement. "Admittedly, these have since picked back up and the next quarter should be more positive, but it underlines the fact that China can no longer be relied upon to deliver consistent and steady growth."

Closer to home, Yum faces "challenging industry conditions in the U.S," said CEO Creed during a conference call Thursday.

U.S. sales growth was flat in the latest period for KFC and Pizza Hut, while Taco Bell saw sales up 2 percent.

Creed noted that Taco Bell's $5 Craving deal had helped push same-store sales positive for the brand in the first five weeks of the third quarter.