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Taco Bell's menu a bright spot for Yum analysts

February 19. 2013 9:01PM
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(AP) KFC and Pizza Hut may face some challenges amid the economic slowdown in China, but Taco Bell's changing menu in the U.S. is giving Wall Street some reason for optimism about Yum Brands Inc.

Over the past week, investors have been scared off by Yum's announcement that it expects a key sales figure in China to drop 4 percent in the fourth quarter, after rising 21 percent a year earlier. The company's stock fell 10 percent following the announcement last Thursday. While analyst reactions to the company's reassurances about China at its investor day Thursday were mixed, the overview of Taco Bell's future got positive reviews.

The U.S. business, which accounts for about a quarter of Yum's operating profit, has been a drag for the company for several years. While KFC and Pizza Hut remain challenged, Taco Bell has been delivering strong results.

In a presentation entitled Boldly Ringing the Bell on Thursday, Taco Bell CEO Greg Creed underscored how two new offerings are building the chain's customer base. To start, the popular Doritos Locos Tacos introduced earlier this year are improving perceptions about the brand among its core customers of young men, he said. Meanwhile, the introduction of higher-quality Cantina Bowls, positioned as an alternative to more expensive competitor Chipotle, are bringing in more women.

Creed noted the two items are not just products, but new platforms that Taco Bell will continue to build on. In 2013, for example, the chain plans to introduce Doritos Locos Tacos in Cool Ranch and a spicy Flamas flavor.

The runway for (Doritos Los Tacos) is massive, he said.

Creed also noted that its customer surveys showed perceptions about Taco Bell's quality were closing in on competitors such as Chipotle.

Next year, the chain will also work to attract more customers throughout the idea with a new snack menu, which will be marketed as Happier Hour. And to spur new restaurant growth, Taco Bell is offering franchisees improved contract terms.

Baird Equity Research analyst David Tarantino kept his Outperform rating on Yum. Although investor sentiment is mixed given uncertainty in China, he noted the long-term prospects in emerging markets remain promising. He also noted that the company still expects to deliver profit growth of at least 10 percent in 2013, supported in part by Taco Bell.

Although the U.S. segment has a history of a choppy profit performance, Tarantino noted that Yum is increasingly optimistic about its ability to achieve profit growth of at least 5 percent in part because of new store openings. After nine years of declines, Tarantino noted Yum achieved net new store openings in the U.S. this year.

Over the next decade, he said Yum expects to double overall sales for Taco Bell, which accounts for 60 percent of U.S. operating profit.

Janney analyst Mark Kalinowski kept his Buy rating on Yum as well, based largely on its growth prospects outside the U.S. But he also noted that the Taco Bell plans to devote more marketing to national TV advertising could boost sales domestically.

Jefferies analyst Andy Barish kept his Hold rating on Yum, citing the slowdown in China. But in the U.S., he noted that Yum's incentives for Taco bell franchisees to build restaurants units could end up taking away market share from McDonald's Corp. and Chipotle Mexican Grill Inc.

Barish also noted that Taco Bell's new menu platforms could help surprise investors in the year ahead.

Yum's shares fell 84 cents to $66.08 in morning trading Friday, a day after posting gains during the analyst conference.

Associated Press

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