Yum Brands earnings miss estimates despite KFC and Pizza Hut's recovery in China

Yum Brands on Wednesday reported quarterly earnings that fell short of analysts' expectations, despite a China sales rebound for KFC and Pizza Hut.

Yum joins the growing list of companies that includes Procter & Gamble and Starbucks that have reported recovering sales in China.

Shares of the company dropped more than 2% in morning trading.

Here's what the company reported for the first quarter compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv:

Yum reported net income of $300 million, or $1.05 per share, down from $399 million, or $1.36 per share, a year earlier. The company said its earnings decreased by 7 cents per share due to declines in the value of unnamed investments, and took an 8 cent per share hit because of foreign currency.

Excluding items, the restaurant company earned $1.06 per share.

Net sales rose 6% to $1.65 billion. Its same-store sales increased 8% in the quarter as its three largest chains outperformed expectations. Digital sales exceeded 45% of transactions, CEO David Gibbs said in the company's earnings release.

Executives credited lower-income consumers with helping drive sales during the quarter. Deals like Taco Bell's $2 and under value menu, KFC's two for $5 wraps and Pizza Hut's $6.99 melts helped attract diners who would otherwise be pulling back on their restaurant spending.

Yum CFO Chris Turner said on a conference call with analysts that inflation, staffing challenges and supply chain disruptions have abated in the U.S., making it easier on the company and its franchisees to operate restaurants. However, he added that some international markets are still struggling with inflation.

KFC's same-store sales rose 9%, thanks to its international markets. In China, KFC's largest market, system sales climbed 17%, helping lift the chain's international same-store sales growth 11%.

Similarly, Pizza Hut reported that China's system sales soared 24% in the quarter. The country is Pizza Hut's second-largest market, trailing only the U.S.

The pizza chain also performed well stateside, reporting domestic same-store sales growth of 8%. Overall, Pizza Hut's same-store sales rose 7%.

Taco Bell reported same-store sales growth of 8% for the quarter. Out of Yum's portfolio, Taco Bell saw the largest increase in openings as the chain focused on expanding its international footprint.

China became Taco Bell's fourth international market to have at least 100 locations. Spain, the United Kingdom and India had already passed that threshold.

Yum opened 746 new locations across all of its chains during the quarter.

Shortly after the quarter ended, Yum completed its exit from Russia through the sale of those KFC restaurants to Smart Service, an existing Russian franchisee. The company had already sold its Pizza Hut locations there to a local operator last summer following Moscow's invasion of Ukraine.

Next quarter, Yum won't face any comparisons that include its Russian business because the company suspended operations there in early March of last year.