Cyclospora outbreak tied to Taco Bell will steal the spotlight from Yum Brands' earnings

Yum Brands is expected to report its second-quarter earnings before the bell on Thursday, but executives will likely face more questions about how the cyclosporiasis outbreak tied to Taco Bell is hitting its business during the current reporting period.

Since the Food and Drug Administration first linked the parasitic outbreak to lettuce served by Taco Bell, daily traffic to the chain's locations has plunged by double digits, according to Placer.ai data. Shares of Yum have fallen 5% over the same period, dragging the company's market value down to about $42 billion.

The outbreak has sickened at least 1,947 people, with 98 hospitalizations and no deaths reported as of Friday, according to the Centers for Disease Control and Prevention. Federal health agencies have named iceberg lettuce supplied by Taylor Farms as the likely culprit.

For Yum, Taco Bell's plummeting traffic is a bigger deal than just a brand struggling.

The restaurant giant counts Taco Bell as one of its "twin growth engines," counting on it to power its earnings and revenue along with KFC's international business. The Mexican-inspired chain has long been the gem of Yum's portfolio, with a passionate fan base and strong same-store sales growth every quarter, even as diners have become more value conscious.

Besides Taco Bell and KFC, Yum owns Habit Burger & Grill. While KFC's international business is booming, its domestic sales have slipped so much that the company no longer breaks out the fried chicken chain's U.S. sales. Habit Burger & Grill, a more recent acquisition, is much smaller with fewer than 400 locations, and is rarely spoken about on the company's earnings calls.

Yum also recently divested Pizza Hut, a key piece of its portfolio that had also been struggling for more than a decade.

The divestiture means even more attention is on Taco Bell, at the exact wrong moment.

For the second quarter, Wall Street is projecting that Yum will report earnings of $1.58 per share on revenue of $2.2 billion, based on a survey of analysts by LSEG. Taco Bell is expected to report same-store sales growth of 7% for the quarter, which ended more than a month before the FDA linked the chain to the outbreak.

But Wall Street now expects that Taco Bell and its parent company will see a tougher stretch in the back half of the year.

"We think the recent outbreak likely has minimal impact on Taco Bell's Q2 results, though debate around impact on Q3 and beyond is the key driver of the stock recently," RBC Capital Markets analyst Logan Reich wrote in a note to clients on July 21. "We lower our Q3 and Q4 [Taco Bell] estimates as a result, however given the recent selloff in shares, this may create an opportunity to the degree that consumer confidence in TB's food safety is not materially impaired beyond this outbreak."

Between June 30 and Tuesday, seven industry analysts revised their expectations for Yum's full-year earnings per share downward, according to a Factset survey of consensus estimates.