Yum! Brands

In the second quarter, Yum Brands reported 7% global constant-currency system sales growth, buoyed by 6% unit and 4% comparable sales growth, excluding Pizza Hut. Taco Bell chalked up 7% comps, but quarter-to-date trends have drifted to a negative 2% rate amid the recent cyclospora outbreak.

Why it matters: Taco Bell's stellar second-quarter performance reflects management's commitment to innovation and the brand's ability to resonate with value-seeking consumers amid an uncertain macro backdrop. That said, near-term cyclospora fears will weigh on momentum. Indeed, management confirmed that sales dipped as much as 20% since the news emerged, peaking on July 18. Since then, trends have improved, which we suspect have been aided by management's prudent transparency and rapid deployment of $1 deals to lure consumers back. We don’t believe near-term strain will dent the banner's clout in the long run. Instead, we expect Taco Bell's stout value proposition to reclaim the spotlight, aided by engagement through its growing loyalty program, which helped drive a 5-point rise in digital penetration to 47%.

The bottom line: Our $155 per share fair value estimate for wide-moat Yum shouldn’t materially change after digesting the release. We see shares trading within a range we'd consider fairly valued, after a low-single-digit intraday pop on July 30, driven by solid results and eased cyclospora fears. As sales pressure and promotions persist, we'll lower our 5.5% comp growth and 24.8% restaurant margin estimates for Taco Bell in 2026. Still, the hit is offset by the time-value benefit, quarterly outperformance, and our expectation that the banner will recoup lost sales.

Coming up: Management plans to revamp KFC globally by modernizing its brand image and focusing on on-trend boneless chicken, sauces, and beverages. We think KFC's efforts to deliver consumer-valued innovation are prudent and underpin our 5.5% estimate of system sales growth over the next decade.

We’ve lowered our fair value estimate to $153 per share from $155, primarily to reflect Cyclospora headwinds at Taco Bell. We now forecast 2.6% comparable sales growth and a 22% restaurant-level margin in 2026, down from 5.5% and 24.8%, respectively. Our valuation implies a fiscal 2027 enterprise value/EBITDA of 18 times.

Overall, we remain sanguine on Yum’s long-term growth profile and forecast 6.1% system sales and 4.2% unit growth over the next decade, excluding Pizza Hut. Our view lags management’s long-term 7% system sales and 5% unit expansion targets. Our more conservative view reflects softer expectations amid rising competitive intensity internationally as more global players expand abroad and the risk of overexpansion. Even so, we expect Yum’s brand prowess and strong franchisee base to continue to result in outsize unit growth.

We view Taco Bell, which should represent 43% of operating profit after the Pizza Hut divestiture, as Yum’s most compelling growth driver. As such, we forecast 6.9% system sales growth driven by 3.8% unit and 3.6% comparable sales growth. With just over 1,000 units overseas, the brand remains significantly underpenetrated relative to KFC and Pizza Hut, suggesting a substantial runway for expansion. However, Taco Bell’s international record has been uneven, with prior store closures and brand repositioning in China. We suspect earlier efforts struggled to mesh the banner with local consumer tastes in a category that hadn’t gained much traction in the region. We believe Yum’s increasingly sophisticated digital ecosystem, combined with existing well-capitalized franchisees, should support a more effective international expansion strategy that leverages learnings from prior forays. We expect the firm’s technology focus to drive comparable sales growth through bolstered personalization, loyalty, and menu innovation, such as expanded beverage lineups and Live Más Café trial concepts. We see Taco Bell as well positioned in the Latin American quick-service category, where scaled competition remains limited outside of Chipotle, which we think has minimal menu overlap and only boasts around 100 international units.

We forecast KFC, which will account for roughly 57% of operating profit in 2027, to deliver steady growth with 5.6% system sales growth supported by 4.4% unit growth and 1.9% comparable sales growth. While we don’t expect competitive pressures in the US chicken category to ease, thereby stifling domestic unit ambitions, we see meaningful opportunities internationally where 89% of its footprint resides. Still, we don’t see a clear path to management’s goal of 75,000 KFC units within our explicit forecast period, and we project the brand to close 2035 with 51,915 units as international markets become increasingly competitive, with brewing interest from global chains. Despite this, we believe KFC’s proven brand portability and resilient unit economics, exemplified by payback periods of roughly two years in China, should support continued growth.

Overall, we forecast Yum’s adjusted operating margin to expand to 35.7% by 2035 from 30.8% in 2025, driven primarily by fixed-cost leverage as the company continues to scale its asset-light franchise model.

We assign Yum Brands a wide Morningstar Economic Moat Rating, underpinned by its intangible assets and cost edge. With more than $68 billion in systemwide sales and a 2% share of the global foodservice market, Yum is the second-largest, behind only McDonald’s at $139 billion (4.2% share) and ahead of Restaurant Brands at $46 billion (1.4%). Yum’s highly recognizable banners, consistent comparable sales growth, attractive unit-level economics that encourage franchisee expansion, and strong international franchisee relationships have helped Yum grow its global share by 60 basis points from 1.6% in 2015. We expect this momentum to continue, particularly for Taco Bell and KFC’s international business. We think Yum’s scale supports a cost advantage through bulk media buying, purchasing-cooperative leverage at the unit level, and the ability to spread technology investments across a vast store base. The result is a 47% return on invested capital, including goodwill, on average over the last decade, well above our 7% weighted average cost of capital estimate, which we think should keep pace for at least 20 years.

We see Yum’s competitive strength anchored in its Taco Bell and KFC businesses, which together accounted for roughly 89% of segment operating profit in 2025.

Taco Bell (38% of 2025 operating profit) demonstrates brand strength through its ability to generate excitement with consumers, thereby propelling strong comparable sales growth, leading unit-level economics for franchisees, and compelling international prospects. Over the past 10 years, Taco Bell has chalked up 4.9% comparable sales growth, on average, ahead of our 3.9% estimate for aggregate food and labor inflation. We attribute this outperformance to the brand’s capacity for on-trend menu innovation that doesn’t derail the speed, value positioning, and convenience that consumers seek. For example, consumers have embraced the banner’s expanded chicken menu featuring unconventional items for the chain, such as chicken nuggets, strips, and more premium roasted offerings (which carry an average check about 40% higher), pushing the chain’s chicken mix to 40% of orders from 25% just a year ago. We consider this an impressive feat in an intensely competitive chicken category.

The banner has remained keen to meet consumers where they are by deepening digital engagement, lifting digital sales to 42% of total sales in mid-2025 from effectively zero in 2018. We view this as impressive given the difficulties we’ve observed with converting drive-thru traffic to digital platforms. We think Taco Bell’s ability to drive comparable sales has translated into strong unit-level profitability, supported by an efficient, labor-light model that is enhanced by Yum’s tech prowess. We estimate roughly four-year store-level payback periods, placing the concept at the favorable end of our four- to six-year restaurant average. We believe these attractive returns underpin ongoing unit expansion and, with robust comp growth, have enabled the firm to grow its US limited-service share to 4.2% in 2025 from 3% in 2016, taking third place in the category. Over the same period, Taco Bell has maintained its position as the leading Latin American quick-service concept, with 45.9% share against Chipotle’s 30.5%. We expect the strong brand should endure and provide continued outperformance. With only 14% of its 9,030 units located internationally, we see plenty of whitespace for the banner.

At KFC (51% of operating profit), we think the brand's prowess lies in its international business. Roughly 90% of the nearly 34,000 KFC units are located outside the US. We view these markets as more attractive than the domestic segment, which has struggled with intense chicken competition and brand repositioning, losing chicken market share to 9% in 2025 from 17.8% in 2016. Internationally, the picture is brighter. We’ve seen mid-single-digit average comp growth and unit expansion over the last five years, which is a testament to the brand’s resonance and franchisee appetite for new development. This has driven 8.4% constant-currency system sales growth over the last five years, outpacing 7.9% global foodservice growth. We see compelling unit-level economics in China, where payback periods of roughly two years outperform most regional peers, supported by Yum China’s investments in localized menu innovation and digital capabilities. While international competition is intensifying as other global chains accelerate expansion efforts, we think KFC’s strong franchisee base and rising digital penetration—already at 63% with management aiming for 100%—should continue to support brand investment and outsize growth abroad.

We believe the firm also has a cost edge. Its advertising spending of $1.8 billion in 2025 was behind McDonald’s $2.2 billion in the US but still ahead of Restaurant Brands’ $1.4 billion. Yum benefits from pooling media purchases across banners to secure lower rates and spreading investments over a larger sales base than smaller peers. At the unit level, company-owned restaurants and US franchisees participate in a purchasing cooperative that secures favorable pricing on commoditized food, packaging, and equipment, though the greatest benefits accrue to concepts with higher unit volume like Taco Bell. In addition, we view Yum’s capacity to roll out large tech, menu, and data integration initiatives across its footprint as a key pillar of its advantage. Yum’s data platform compiles over 140 million customer profiles across all its brands and supports AI marketing efforts that management indicates are 5 times more effective than traditional outlets, posting double-digit bumps in engagement as a result. Yum has also introduced proprietary AI tools under the Byte by Yum banner to support kitchen operations, scheduling, staffing, order and driver tracking, and more, which should result in continued efficiency improvements at both the restaurant and corporate levels.

As its fully integrated technology platform gains adoption, it should bolster Yum’s data ecosystem and, in turn, support better innovation, customer engagement, and unit-level efficiency.

Taco Bell remains in the early stages of building out its international footprint, and stronger evidence of portability across markets could lift Yum’s long-term unit growth trajectory.

With 72% of its units situated across international markets and a highly franchised footprint, Yum is better insulated from a prolonged downturn in any single geography.

The financial health of domestic KFC franchisees could deteriorate if the economic backdrop weakens further, leaving the banners poorly positioned to reinvest capital in their restaurants to spur growth.

Increased international expansion by competing US chains could temper results for established concepts overseas.

A faster pivot toward healthier options could stifle demand for Yum’s processed fare, especially as GLP-1 penetration grows and if government policies reshape the landscape.