updated 7/11/2007 6:54:56 PM ET 2007-07-11T22:54:56

Fast-food giant Yum Brands Inc. said Wednesday that its second-quarter profit rose by 12 percent, beating Wall Street projections, on the strength of sizzling international sales that offset an essentially flat U.S. performance.

The operator of KFC, Taco Bell and Pizza Hut reported double-digit operating profit growth in its China and international divisions. Based on its strong overseas performance, Yum raised its full-year forecast for growth in earnings per share to 12 percent from 11 percent.

In the United States, Taco Bell had another sluggish performance, though it was an improvement from the prior quarter as the chain rebounds from two setbacks — an E. coli outbreak at some of its East Coast restaurants last year and a rat infestation in a franchise KFC/Taco Bell store in New York City in February. Yum predicted steady improvement for the chain in coming months.

For the three months ended June 16, Yum posted net income of $214 million, or 39 cents per share, compared with $192 million, or 34 cents a share, in the year-ago period.

Revenue grew 9 percent to $2.37 billion from $2.18 billion a year earlier.

Analysts polled by Thomson Financial had forecast a profit of 36 cents per share.

Yum reported second-quarter operating profit of $65 million in its burgeoning China division, up 14 percent from $57 million in the year-ago period. Higher costs for some ingredients, plus increased labor costs, prevented an even stronger showing, Yum said.

Operating profit in its international division, which excludes the separately grouped China, Thailand and Taiwan, totaled $101 million for the second quarter, up 15 percent from a year earlier.

“Our mainland China business continues to generate strong top-line growth,” said Yum Chairman and CEO David C. Novak, adding that the international division had one of its best quarterly performances ever.

Yum said it remains on track to open 375 more restaurants in mainland China and 800 stores in its international division this year, continuing an expansion surge spanning this decade. Yum said it expects the pace of development to continue.

In the United States, second-quarter operating profits fell 2 percent to $191 million, compared with $194 million in the year-ago period.

U.S. same-store sales dropped 3 percent at company-owned restaurants, primarily because of a 7 percent decline at Taco Bell, Yum said. That was an improvement for the chain from the first quarter, when same-store sales fell by 11 percent at company-owned Taco Bell restaurants.

The company attributed Taco Bell’s ongoing sluggishness to the pair of highly publicized incidents. The E. coli outbreak in late 2006 in the Northeast caused more than 70 Taco Bell customers to become sick. Yum responded by adding more testing to verify the safety of its supply of lettuce, which was considered the most likely source of the outbreak.

Sales also were hurt when a TV news camera showed rats running through a New York City KFC/Taco Bell restaurant. As a precaution, Yum temporarily closed 12 of its New York City restaurants owned by franchisee ADF Cos. All the stores later reopened following health inspections except for the one store where the rats were seen. That store remains closed.

Yum spokesman Jonathan Blum said Wednesday that the company expects stronger U.S. sales at its chains in the second half of the year, including at Taco Bell.

“The Taco Bell business is improving slowly,” he said. “It’s steady improvement, and we expect to see even more improvement in the second half.”

For the first six months of the year, Yum’s profit rose 13 percent to $408 million from $362 million in the same period last year.

The company’s brands also include Long John Silver’s and A&W All-American Food Restaurants.

Yum Brands shares rose $1.46, or 4.4 percent, to $34.41 Wednesday. The company’s results arrived after the close of trading.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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