Higher costs hurt Yum's 2Q profits

LOUISVILLE — Shares of Yum Brands Inc. tumbled more than 6 percent Thursday, a day after the fast-food company blamed surging commodity costs for taking a bite out of U.S. profits.

Yum's CEO, speaking on a conference call with analysts Thursday, expressed frustration with a slumping U.S. performance at KFC, one of the company's core chains along with Taco Bell and Pizza Hut.

”KFC is taking the bloom off of what could have otherwise been a very good year,“ David C. Novak said. ”That, along with commodities, have taken the fun out of the U.S. business this year.“

Despite commodity inflation and weakness at KFC, Yum beat Wall Street forecasts in the second quarter. Novak said Yum's brand and geographic diversity lets it weather tough times.

Louisville-based Yum said Wednesday its overall second-quarter profit rose 4 percent, led by 38 percent growth in operating profit in its China division and 18 percent growth in its international division. Those performances offset a 12 percent drop in U.S. operating profit for the quarter. For the first half of the year, net income rose 17 percent.

In a sign of confidence, Yum raised its full-year earnings forecast by 2 cents to $1.89 a share, which would be up 12 percent over last year's performance.

Still, Yum shares (YUM: NYSE) closed down $2.42, or 6.6 percent, at $34.05 in trading Thursday.

Yum's chief financial officer Rick Carucci told analysts Thursday that the company expects a decline in full-year U.S. profits because of weak first-half performance.

Systemwide, U.S. same-store sales in the second quarter were up 2 percent from a year ago, but commodity costs increased $30 million. Inflationary pressures are expected to persist, as Yum said it's bracing for record commodity inflation exceeding $100 million for the year.

Beyond commodity costs, Novak singled out KFC as ”our only major soft spot.“ He said Taco Bell and Pizza Hut posted strong performances this year in the United States.