Cyclospora outbreak has hurt Taco Bell but sales are already improving, Yum Brands CEO says

Yum Brands on Thursday said the cyclospora outbreak tied to Taco Bell restaurants damaged sales at the chain in its current quarter.

"The brand has seen a meaningful near-term sales impact," CEO Chris Turner said on the company's second-quarter earnings conference call, adding that the company expects the downturn to be a temporary problem for Taco Bell.

In the third quarter to date through July 27, Taco Bell's U.S. same-store sales have fallen 2%.

"Since the U.S. food safety industry issue became front and center only two weeks ago, we saw maximum impact to sales over the weekend of July 18," CFO Ranjith Roy said.

Since the Food and Drug Administration first linked the parasitic outbreak to iceberg lettuce served by Taco Bell in mid-July, daily traffic to the chain's locations has plunged by double-digit percentages, according to Placer.ai data. Yum depends on Taco Bell as a "growth engine" for the company, and the crisis puts that title in jeopardy, at least in the near term.

Sales trends have been "steadily improving" over the last 10 days, according to Turner, and brand sentiment on social media has returned to pre-crisis levels. Roy said that average sales over the last four days have already made a roughly 50% recovery, compared with the steepest sales declines after the initial announcement.

"Elevated uncertainty initially weighed on consumer demand, and since then, consumers have become increasingly aware that this is an industry-wide issue, not an issue specific to Taco Bell," Turner said.

Yum's stock climbed 4% in premarket trading following the optimistic commentary on sales trends. Entering Thursday, it had fallen about 5% since the FDA tied the company to the outbreak.

Cyclospora is a water-borne parasite and often found on fresh produce, like iceberg lettuce, herbs and raspberries. Outbreaks are more common during the warm months, although the ongoing outbreak is the worst in recent history.

Taylor Farms, the supplier of the affected lettuce to Taco Bell, has issued recalls for a wider swath of its products that include iceberg lettuce. Federal health agencies have also announced that they are tracking a second cluster of cyclospora cases and have not yet announced a likely source.

Other restaurant chains not implicated in the outbreak have also seen their sales slip. Chipotle Mexican Grill executives said consumers' mistrust of chains serving fresh lettuce weighed on sales in the second half of July. Chipotle's options include romaine lettuce and a Supergreens mix, but not iceberg lettuce.

The results Yum reported are for its second quarter ended June 30, before it was tied to the foodborne illness outbreak. The restaurant company does not typically provide an outlook for same-store sales growth or earnings per share for the full year or the next quarter.

Here's what Yum reported compared with what Wall Street was expecting, based on a survey of analysts by LSEG:

Yum reported second-quarter net income of $853 million, or $3.08 per share, up from $374 million, or $1.33 per share, a year earlier.

Excluding charges related to its strategic review of Pizza Hut and other items, the restaurant company earned $1.62 per share.

Net revenue climbed 12% to $2.17 billion, lifted by new restaurant openings.

The company's global same-store sales rose 3% in the quarter, roughly in line with StreetAccount estimates of 2.9% growth.

Taco Bell's same-store sales jumped 7% in the quarter. The Mexican-inspired chain has long been the top performer in Yum's portfolio.

KFC reported same-store sales growth of 2%. In China, its largest market, system sales rose 6%, according to Yum.

Pizza Hut's same-store sales slipped 1%. Last month, Yum announced the sale of the long-struggling pizza chain to private equity firm LongRange Capital and Yum China for $2.7 billion.

Correction: Yum Brands on Thursday reported mixed quarterly results. An earlier version misstated the day.