Executive Summary / Key Takeaways

• Yum! Brands operates a highly resilient, asset-light franchisor model, boasting a diverse portfolio of iconic global brands that consistently generate substantial cash flows.
• The company's "twin growth engines" – Taco Bell U.S. and KFC International – are driving robust system sales and unit expansion, significantly outperforming many industry peers in a challenging global consumer environment.
• "Byte by Yum!", the proprietary AI-powered technology platform, is a critical differentiator, enhancing operational efficiency, customer experience, and accelerating digital sales, which now comprise a record 57% of system sales.
• Management projects 8% core operating profit growth for 2025 (excluding the 53rd week benefit in 2024), underpinned by strategic investments, operational improvements, and a commitment to increased shareholder returns.
• While facing macroeconomic headwinds and geopolitical pressures, Yum!'s diversified global footprint and technological leadership position it for sustained long-term value creation.

A Global QSR Powerhouse Embraces the Future

Yum! Brands, Inc. stands as a global leader in the quick-service restaurant (QSR) industry, commanding a vast empire of over 61,000 restaurants across more than 155 countries and territories. Its portfolio of iconic brands—KFC, Taco Bell, Pizza Hut, and The Habit Burger Grill—offers a diverse culinary landscape, from fried chicken and Mexican-inspired cuisine to pizza and chargrilled burgers. This extensive reach, coupled with a highly efficient 98% franchised model, underpins a business designed for resilient cash flow generation and global adaptability.

The industry landscape is currently dynamic and complex, marked by a cautious consumer environment in the U.S. and globally, alongside significant opportunities in burgeoning segments like the $25 billion U.S. beverage category. The broader U.S. foodservice market is projected for substantial growth, with a forecasted surge of $3.11 trillion between 2024 and 2029, representing an impressive compound annual growth rate (CAGR) of 30.6%. Amidst this backdrop, the digital revolution is transforming restaurant operations, with artificial intelligence (AI) rapidly becoming the new operating system for the industry.

Yum!'s overarching strategy, encapsulated in its "Recipe for Good Growth," centers on building "Loved, Trusted, and Connected" brands. This involves accelerating digital and technology adoption, fostering increased collaboration across its system, and leveraging its immense global scale. This strategic framework is not merely aspirational; it is a direct response to evolving consumer demands and competitive pressures, positioning Yum! to capitalize on market shifts and solidify its leadership.

In the fiercely competitive QSR arena, Yum!'s multi-brand approach provides a distinct advantage. Taco Bell, in particular, consistently outperforms the U.S. limited-service category, outpacing it by 4 percentage points in Q2 2025 and actively gaining market share from both fast-casual and traditional QSR rivals. This success is a testament to its unique value proposition and innovative menu. While KFC U.S. and Pizza Hut U.S. face intense competition and challenges in value messaging, the company's diversified portfolio allows it to manage country-specific challenges and continue investing through uncertainty. Yum!'s asset-light model and robust network of highly capitalized franchisees, such as Americana in the Middle East and the Serrano Group in Latin America, provide a strong foundation, enabling investment through near-term noise and offering a competitive edge against more capital-intensive rivals.

The Digital Revolution: Byte by Yum! as a Strategic Moat

At the heart of Yum!'s strategic differentiation lies "Byte by Yum!", its comprehensive suite of proprietary Software-as-a-Service (SaaS) products. This integrated technology platform is designed to deliver faster, more seamless consumer experiences, streamline operations, and empower restaurant teams globally. This internal development strategy, a departure from reliance on third-party platforms, ensures Yum! controls its technological destiny, providing its franchisees with leading-edge capabilities at a competitive cost.

The tangible benefits of "Byte by Yum!" are evident and quantifiable across the business. Digital sales reached a record 57% of system sales in Q2 2025, marking a 7 percentage point increase year-over-year. KFC's digital sales alone surged 22%, with its digital mix climbing to over 60%. This digital prowess is further amplified by AI-driven personalized one-to-one advertising, which has sent over 200 million communications this year, delivering up to 5x incrementality compared to traditional approaches.

Specific Byte components demonstrate significant operational and financial advantages. "Byte Connect," Yum!'s menu and order integration platform for third-party delivery providers, is scaling across the Pizza Hut U.S. system, reducing order cancellations and offering franchisees a significant cost saving at a discount relative to market alternatives. Leveraging developer AI tools, Byte Connect reduced the time from ideation to national launch from an estimated nine months to just three months. Similarly, Yum!'s voice AI solution, currently deployed in 600 restaurants, is "outperforming everyone in the industry," enhancing both team member and consumer experiences. Management noted that in a 1.5-2 hour headset use, only one intervention was needed, leading to lower employee turnover. This voice AI is slated for expansion to the first drive-thru restaurant in Q3 2025.

"Byte Commerce," the web and app ordering platform, has driven impressive results, with Pizza Hut Mexico experiencing nearly 40% month-over-month app transaction growth since its Q2 launch, and Pizza Hut U.K. achieving a 67% year-over-year increase in mobile app transactions. For back-of-house operations, "Byte Restaurant Coach" is active in over 30,000 restaurants, with AI informing manager decisions and dynamic routines. This system powers operational excellence across nearly all Pizza Hut stores globally, excluding China. Furthermore, the AI-powered labor scheduler, deployed in over 5,000 Taco Bell U.S. stores, significantly improves labor planning accuracy and efficiency. Early tests of AI-driven marketing campaigns have also shown a 2x improvement in consumer engagement compared to traditional email marketing.

Yum!'s commitment to technological leadership is underscored by its partnership with NVIDIA (NVDA), announced in March 2025. This collaboration aims to accelerate the development and deployment of cutting-edge AI solutions across voice-automated drive-thru and call center operations, computer vision technology for back-of-house efficiency, and advanced restaurant intelligence. Crucially, Yum! will retain ownership of the intelligence derived from this partnership, allowing for tailored customization and further competitive advantage. This strategic investment in AI is foundational, positioning Yum! at the forefront of what management believes will be the "new operating system of restaurants." For investors, this technological moat translates directly into enhanced competitive positioning, improved financial performance through higher sales and lower costs, and a robust pathway for long-term growth.

Performance with Perspective: Twin Engines Drive Resilient Growth

Yum! Brands delivered a strong second quarter in 2025, demonstrating the resilience of its business model amidst a challenging consumer environment. System sales grew 4% (excluding the impact of foreign currency), driven by robust unit growth at KFC International and persistent market share gains at Taco Bell U.S. Core operating profit increased 2% to $646 million for the quarter, reflecting the strength of its diversified portfolio. Net income for Q2 2025 was $374 million, up from $367 million in the prior year, with diluted EPS at $1.33 ($1.44 excluding special items). Total restaurant-level margins, however, saw a 150 basis point decline year-over-year to 16.3%, primarily due to an unfavorable commodity lap at Taco Bell and the integration of newly acquired KFC U.K. stores.

Year-to-date through June 30, 2025, total revenues reached $3,720 million, compared to $3,361 million in the prior year. Net income for the first half was $628 million, down from $681 million, largely impacted by a $102 million reserve related to a Mexican subsidiary's tax dispute. Operating cash flow for the first half of 2025 was $850 million, a notable increase from $705 million in 2024, driven by lower incentive compensation payments, reduced income tax payments, and an increase in operating profit before special items. Net cash used in investing activities decreased to $130 million from $253 million, while net cash used in financing activities increased to $741 million from $547 million, primarily due to higher share repurchases.

The company's "twin growth engines" continue to be standout performers. Taco Bell U.S. delivered an impressive 4% same-store sales growth in Q2 2025, significantly outpacing the broader U.S. limited-service category. This performance was fueled by successful crispy chicken offerings, with total chicken sales up over 50% in the last two years, and an expanded beverage lineup. Taco Bell U.S. is on track to achieve industry-leading restaurant-level margins of 24-25% for the full year. KFC International also demonstrated strength, with same-store sales growing 3% in Q2, driven by strong performances in key markets like South Africa, Spain, Canada, Japan, and the U.K.

However, challenges persist in certain segments. KFC U.S. experienced a 5% decline in same-store sales in Q2 2025, reflecting opportunities to improve value perception and innovation. New leadership, including Catherine Tan-Gillespie as President of KFC U.S., is spearheading a "Kentucky Fried Comeback" campaign. Pizza Hut's global same-store sales declined 1% in Q2, with a 5% drop in the U.S. attributed to an "insufficient value message" in a competitive market. Internationally, Pizza Hut saw a 2% increase in same-store sales, benefiting from recovery in the Middle East. The Habit Burger Grill division's system sales declined 1% in Q2, consistent with the prior year, due to soft consumer demand, though new "Gotta Habit Meal Deals" are showing positive momentum.

Yum!'s liquidity and capital allocation strategy remain robust. The company consistently generates over $1.4 billion in annual operating cash flows. Its net leverage ratio stood at 3.8x EBITDA at the end of Q2 2025, with a target of maintaining approximately 4x over the medium term. This stable leverage, coupled with a $1.5 billion revolving credit facility, provides ample financial flexibility. The company recently increased its quarterly dividend to $0.71 per share.

and has repurchased $336 million in shares year-to-date, with $1.3 billion remaining under its current authorization. A strategic interest rate swap fixed $1.5 billion of variable-rate debt at 5.09%, expected to yield $10 million in interest savings for 2025.

Outlook and Strategic Imperatives: Sustained Growth Ahead

Yum! Brands maintains a confident outlook for 2025, projecting 8% core operating profit growth, excluding the benefit of the 53rd week in 2024. This guidance reflects management's belief in the resilience of its business model and the effectiveness of its strategic initiatives, even amidst a dynamic global operating environment. Unit growth is anticipated to reach at least 4% for the full year, or 5% when excluding the one-time impact of the Turkey market exit. The company expects to meet or exceed its gross build targets from the prior year across all brands.

Looking ahead, Taco Bell U.S. is expected to continue its strong performance, targeting 24-25% restaurant-level margins for the full year. The brand is making a "bold bet" on the beverage category, aiming for $5 billion in total system beverage sales by 2030, with its "Live Mas Cafe" concept expanding to 30 locations by year-end 2025. Crispy Chicken is slated to become a permanent platform for Taco Bell in 2026, with new shredded beef offerings later in 2025. JPMorgan projects significant long-term unit growth for Taco Bell, with U.S. units potentially reaching 9,000 by 2030 and international units expanding to 2,000.

KFC International is also poised for continued expansion, with a target of 70% kiosk penetration by 2026 (excluding China). JPMorgan (JPM) forecasts KFC International (excluding China) to grow to 22,300 units and KFC China to 19,400 units. The "Saucy by KFC" test concept, which has seen sales more than double the U.S. system average, is planned for further expansion with several additional test units by year-end 2025. The "Byte by Yum!" digital ordering platform is set to expand to five additional international markets in 2025, integrating AI-driven personalization and omni-channel loyalty software. AI-powered labor scheduling and inventory management solutions are also slated for rollout across other brands.

While the outlook is positive, Yum! acknowledges several risks. The global macroeconomic environment remains challenging, with geopolitical conflicts, particularly in the Middle East, continuing to impact sales and the financial health of some franchise partners. The company is also engaged in a significant tax dispute with the IRS, facing a $4 billion assessment related to a 2014 corporate reorganization, and has recorded a $102 million reserve for a Mexican tax matter. Additionally, the "One Big Beautiful Bill Act" (OBBBA), enacted in July 2025, is being evaluated for its impact on foreign tax credit utilization. Inflationary pressures on building products could affect development costs, though Yum!'s international focus and Taco Bell's strong margins are expected to mitigate this. The need for Pizza Hut U.S. and KFC U.S. to strengthen their value propositions and resonate with consumers in a highly competitive domestic market remains a key strategic imperative.

Conclusion

Yum! Brands, Inc. is a compelling investment story, rooted in its asset-light, multi-brand franchisor model that consistently delivers robust cash flows and shareholder value. The company's strategic focus on its "twin growth engines"—Taco Bell U.S. and KFC International—continues to drive market share gains and unit expansion, showcasing remarkable resilience in a complex global environment. This foundation is significantly strengthened by "Byte by Yum!", a proprietary AI-powered technology platform that is not just an operational enhancement but a formidable competitive moat, driving digital sales, optimizing restaurant efficiency, and enabling hyper-personalized consumer engagement.

Despite macroeconomic headwinds, geopolitical challenges, and ongoing tax disputes, Yum! is proactively addressing vulnerabilities through strategic leadership changes, targeted value initiatives, and aggressive technological innovation. The company's commitment to its 8% core operating profit growth algorithm for 2025, coupled with plans for increased shareholder returns and a disciplined capital structure, underscores its confidence. Yum!'s ability to leverage its global scale, diverse brand portfolio, and leading-edge technology positions it as a compounding investment poised for sustained long-term growth and continued outperformance in the evolving QSR landscape.