Yum! Brands, Inc. (YUM) Earnings

Management highlights

- **Strategic Transactions & Capital Allocation** * Completed strategic review of Pizza Hut and entered agreements to sell the business to Long Range Capital and Yum China for an aggregate $2.7 billion, plus a potential $75 million earn-out, with closing expected in August 2026. * Anticipated net proceeds of $2.3 billion from the sale will be used to pay down revolver balances, with the majority of remaining proceeds allocated to share repurchases, subject to market conditions. * Repurchased $670 million of shares in the first half of 2026, funded by free cash flow and revolver draws. - **Brand Strategy & Innovation** * KFC launched a new global strategy to become the standard for modern chicken QSR, focusing on boneless chicken menu innovation, expanded sauce customization, refreshed visual brand identity, and upgraded restaurant experiences. Core elements of the strategy will roll out across KFC's top 20 markets by end of 2027. * KFC benefits from strong category tailwinds: chicken is the world's fastest growing protein, with a 20,000-unit long-term growth opportunity in underpenetrated markets including India, Southeast Asia, West Africa, and Brazil. * Taco Bell U.S. outperformed the broader QSR industry for nine consecutive quarters, driven by a strategy of compelling value, differentiated innovation, and cultural relevance. It completed high-performing $1 promotional drops for Enchirito and Mexican Pizza to drive consumer re-engagement following a recent industry-wide food safety incident. * Taco Bell International grew same-store sales strongly across key markets, with the first international launch of Baja Blast in the U.K. lifting same-store sales 14% in its first week. - **Digital & Technology Capabilities** * Excluding Pizza Hut, first half 2026 digital sales exceeded $17 billion, up 25% year-over-year. Digital capabilities are centered on Byte, Yum!'s proprietary AI-enabled common technology platform, which simplifies operations, improves personalization, enables cross-channel loyalty recognition, and reduces third-party dependency. * Byte enabled Taco Bell U.S. to rapidly deploy voice AI to over 900 restaurants, and will eventually power the vast majority of Yum!'s system sales outside of China. * AI is integrated across operations: 400+ internal specialized AI agents have been built for business workflows, with employee daily usage of AI productivity tools up 50% year-over-year. AI-powered ByteCoach provides restaurant managers with personalized operational performance recommendations. * Loyalty expansion is a core priority: KFC will have loyalty programs active in markets representing over 75% of its non-China system sales by end of 2026; Taco Bell will launch a redesigned, more personalized app in Q3 2026. - **Leadership & ESG** * Long-time COO and Chief People and Culture Officer Tracy Skeans announced her retirement after 25 years with the firm; Nye DeLeon will succeed her as of November 1, 2026. * Released the 2025 annual Global Citizenship and Sustainability Report, with Yum! and its franchisees reaching 6.5 million people and donating the equivalent of 47 million meals in 2025.

Guidance

- Yum! met or exceeded all first half 2026 performance targets excluding Pizza Hut, and was confident in achieving full year 2026 targets prior to the Taco Bell U.S. sales impact from the industry-wide food safety issue. - Taco Bell U.S. same-store sales growth stood at -2% quarter-to-date through July 27, 2026, following the mid-July peak impact from the incident. Management expects sales declines have moderated materially and the sales impact will be temporary, with trends steadily improving as of the call. - Taco Bell U.S. third quarter equity store-level margins are expected to range between 19% and 21%, impacted by temporarily depressed sales volumes, promotional investment to drive recovery, and concentration of Taco Bell's equity footprint in the most affected markets. - Management maintained its long-term target of holding G&A at ~1.7% of system sales pro forma for the Pizza Hut divestiture, and expects to continue delivering operating leverage as system sales grow, even as transition services for Pizza Hut are phased out through 2027. - KFC is on track to deliver its best full year development year on record, supported by strong franchise partner confidence in the brand's long-term potential.

Segment performance

Excluding Pizza Hut (sold in Q2 2026), Yum! Brands delivered 7% system sales growth, 6% unit growth, and 4% same-store sales growth for Q2 2026. Core operating profit grew 8% year-over-year, after a 3 percentage point drag from re-franchising gain phasing and Habit store closure costs. Digital sales reached $9 billion, accounting for 61% of total revenue excluding Pizza Hut. - KFC: KFC represents 58% of divisional operating profit (excluding Pizza Hut). It delivered 6% system sales growth, 7% unit growth, and 2% same-store sales growth. 660 gross new stores were opened across 55 markets in Q2. Digital mix reached 67%, up 5 percentage points year-over-year. It contributed ~76% of total new unit openings in the quarter. - Taco Bell: Taco Bell represents 43% of divisional operating profit (excluding Pizza Hut). It delivered 7% same-store sales growth in Q2. 25 gross new units were opened in the U.S. Digital mix reached 47%, up 5 percentage points year-over-year. U.S. Taco Bell achieved restaurant-level margins of 26.2%, a 170 basis point expansion year-over-year. - The Habit Burger Grill: The Habit delivered 4% same-store sales growth in the first half of 2026. Digital mix reached 55%, up 9 percentage points year-over-year, and incurred store closure costs that impacted core operating profit in Q2. - Pizza Hut: Pizza Hut was fully divested in June 2026 via two separate sale agreements, and is no longer part of Yum!'s ongoing segment performance.

Risks & headwinds

- An ongoing industry-wide U.S. food safety issue has created meaningful near-term downward pressure on Taco Bell U.S. sales, and has temporarily reduced margins in the third quarter of 2026. - Global macroeconomic turbulence continues to create operating headwinds for restaurant businesses across Yum!'s portfolio. - The coordinated global rollout of KFC's new brand and product strategy will take multiple years to complete across 150+ markets, requiring tailored localization for each market and incremental investment from franchise partners, which could delay performance gains. - Forward-looking performance results are subject to uncertainties that could cause actual outcomes to differ materially from management's expectations, including consumer sentiment shifts and unforeseen operational disruptions.

Analyst Q&A

• Q: How is Taco Bell's post-food safety incident recovery progressing, and what actions is management taking to drive consumers back? /

  A: Through July 27, 2026, Taco Bell U.S. same-store sales are down 2% quarter-to-date, with the peak impact hitting the weekend of July 18. Early trends show steady improvement, with average sales over the most recent four days already halfway back to prior year levels. Consumer social sentiment has already returned to pre-issue positivity, as consumers recognize the issue is industry-wide, not Taco Bell-specific. Management is leveraging Taco Bell's core strategy of high-profile promotional value drops and new product innovation to drive re-engagement. (441 characters)

• Q: What is the outlook for KFC's long-term growth, particularly after the new strategy launch, and can same-store sales growth improve from current 2% levels? /

  A: KFC benefits from strong structural tailwinds as the global leader in the fast-growing chicken category, with a 20,000-unit long-term growth opportunity in underpenetrated emerging markets. The new global raise-the-bar strategy is focused on boosting consumer relevance, improving restaurant economics, and expanding digital/loyalty capabilities to drive faster growth. Management is dissatisfied with current 2% same-store sales growth and has set a long-term objective of achieving higher same-store sales growth and higher average unit volumes. The strategy is already delivering strong early proof points in markets including the U.K., Korea, Japan, and Brazil. (552 characters)

• Q: How did Taco Bell grow its digital mix to 47%, and what role has digital played in driving comps growth? /

  A: Taco Bell's digital mix grew from just 1% in 2018 to 47% today, driven primarily by its first-party loyalty program that goes far beyond basic earn-and-burn structures. The program builds deep connections with Taco Bell's core fandom via exclusive offers, experiential drops, and personalized engagement that incentivizes consumers to use the brand's app and self-service channels. Byte, Yum!'s proprietary technology platform, powers Taco Bell's digital capabilities, supporting both strong top line comps growth (which has outpaced the broader QSR industry for nine straight quarters) and strong stable margins for franchisees despite recent industry inflation. (521 characters)

• Q: What is the strategic rationale for KFC's new Quench global beverage platform, and what early results have been seen in test markets? /

  A: Quench was developed in response to consumer data showing growing demand for unique, crafted beverages from younger consumers, filling a gap in KFC's global product offering. It requires manageable capital expenditure, with tiered packages tailored to market average unit volumes and consumer demand levels. Early tests in the U.K. and Australia have shown meaningful incremental same-store sales lift relative to the investment, so management will move forward with rolling out the platform in those markets, with further refinement as the rollout expands. Quench is a core part of KFC's global strategy to attract the next generation of consumers. (476 characters)