Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Yum Brands Inc (YUM, Financial) delivered a 10% growth in core operating profit for the second quarter.
- Taco Bell U.S. achieved a 7% increase in system sales, driven by innovative menu items like Cantina Chicken.
- KFC International reported a mid single-digit increase in same-store sales, excluding China and markets impacted by the Middle East conflict.
- Digital sales across Yum Brands Inc (YUM) grew significantly, with KFC digital sales (excluding China) up nearly 20% and Taco Bell's loyalty sales up over 30%.
- Yum Brands Inc (YUM) opened 894 units in the second quarter, contributing to a 5% year-over-year unit growth.
Negative Points
- Same-store sales for KFC were down 3%, largely due to the Middle East conflict and underperformance in the U.S. market.
- Pizza Hut's international same-store sales remained negative, partly due to a stalled recovery in Malaysia and Indonesia.
- The Middle East conflict continued to pressure system sales growth, affecting markets beyond the immediate conflict zone.
- Habit Burger Grill experienced a 1% decline in system sales, with same-store sales growth remaining suppressed.
- Foreign currency translation had a $12 million negative impact on reported operating profit for the quarter.
Q & A Highlights
Q: My question is on your outlook given all the crosscurrents first thing in the macro environment. And I was wondering if you could maybe elaborate on how you're thinking the same-store sales could progress since the second half lays out. And I know you have easing comparison, but there's a lot of uncertainty and a lot of markets that you called out. So just wondering if you could provide some context on how you're thinking about it within your 8% profit growth or core profit guidance for the year?
A: Yes. Thanks, David. I think our thinking hasn't changed that we learn more obviously every week. As I think we said beginning of the year, as we progress through the year, we see sequential improvement every single quarter in same-store sales growth. Obviously Q4 becomes a much easier lap as we start to lap the Middle East conflict. Q3 is actually slightly harder lap for Taco Bell, but in general, an easier lap for Yum! And therefore, we are -- we continue to forecast an improvement quarter-to-quarter in same-store sales growth, tough to forecast. But we know we have all the right levers to pull in our brokers are performing well despite some of these challenges. I mean, KFC International, for example, was up 11% on a two-year basis despite the Middle East impacts you saw what Taco Bell did in Q2. I think there's a lot of reasons to be optimistic. But as you say, a choppy environment, we know we can get through it this year, then obviously gets much easier lap next year.
Q: I was hoping to dive a little bit in the G&A because obviously that seems to be a mover on the core operating profit growth for the year. And I was hoping you could maybe provide a little bit more color on some of the puts and takes through the first half and then what you see in the back half unfolding? And specifically how we should think about this piece for the business growing into '25. Should we expect it to return back to kind of normal cadence, especially if incentive comp resets again?
A: Yes. Thanks, Jon. Look, I think what you're seeing happen this year is the plan that our management team has been driving is playing out as expected. If I were to kind of sum up what we're doing, we're reallocating and streamlining our G&A to drive faster and more efficient growth for Yum! and or our franchisees. And there's a few buckets of levers that are driving that. Of course, we've said that there are some one-time benefits this year on a net basis for the year. The second, digital and technology is an important area here. So we talked about that this year. We're starting to bend the curve. And what we mean by that is over the past few years, we invested ahead on behalf of our franchisees, which burdened the P&L a little bit. But as we get more and more adoption of our platforms and we have a fee income from that, it reduces that burden. We also acquired four companies, hired a lot of people the last several years. Those capabilities are maturing. And as we mature, we find ways to operate more effectively internally to organize better. And that allows us to get more done at lower costs, which benefits Yum! and our franchisees. And we've got strong governance of our tech spend in place. I'd say the third area is productivity and other parts of the business. We've been driving this resource optimization program. We're finding ways to operate more effectively in parts outside of D&T. Now, in some cases, that's enabled by becoming a more digital company. And then finally, as we said in the remarks, our GMs are doing a really good job driving their plans as they see how the businesses unfolding around the globe. So those are the factors that are driving the G&A trends this year. Now it's important to note that we are reinvesting at the same time. We're putting investments into A.I. We mentioned over the last call, 40 plus A.I. projects in motion. We're investing it in areas like our marketing capabilities, supply chain and the culture and talent. So at the same time, we're driving the long-term health of the business. If we look to 2025 and beyond, we're going to continue to get leverage on the G&A line. You set aside year-over-year factors like changes and in incentive comp, we expect to get leverage on the G&A line. And I think you'll see a normal growth rate in terms of G&A for an asset like a company like ours.
Q: I have a two-part question on Taco Bell. I'm looking to understand how you retain Taco Bell's U.S. 2Q same-store sales trends. Did you ship promotional focus to new menu items away from Cantina Chicken while the remainder of the drive-thru segment intensified the focus on value? And the bigger question is that can you share your confidence in the ability to hold Taco Bell's 2Q to your trends in the back half of 2024? Thanks.
A: Sure. Obviously, Taco Bell is a lot of really positive results coming in in Q2, and we feel good about Taco Bell for the balance of the year. Why do we feel so good about the brand? First of all, in this environment where the consumer versus public pulling back a little bit being the always on value brand. Remember, Taco Bell's cravings value menu is always on. It's got 10 items. They're unique items that nobody else in the industry has. And they're not like junior size, diversions of a core item, they're unique. They stand in their own, right? They're incredibly craveable. That has served us well, and it really puts a moat around us when it comes to value. In addition, we have a one-time offerings like the Luxe Box, at a $7 price point, which is an incredible amount of great-tasting food for that price. So we have a great way to play value that makes it hard for others to compete. And then when you couple that with things like the Cantina Chicken launch in Q2, which is really a platform that will continue to innovate off of as we move forward. You saw in Q3, we just launched the Cantina Chicken Cheesy Street Taco Chalupas that are off to a good start. That's an example of what we can do with that menu. We'll probably rehit Cantina Chicken in Q4. And then you've got all sorts of other great things going on at Taco Bell, like speed of service, improving loyalty program launches. So hopefully you're getting the sense of the confidence we have in Taco Bell as we move forward. And in this environment, I think we're really seeing Taco Bell stand out from the crowd, outperforming the QSR industry by a wide margin.
Q: Congrats on navigating a challenging backdrop. You delivered 8% core operating profit growth year to date, despite negative same-store sales year to date. In this operating profit growth in the first half is on par with the full year guidance, of course, and I know the environment is still challenged, but
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
