Does Yum!'s New Taco Venture Matter?

While Yum! Brands reported stellar earnings, most focused on the announcement of a new high-brow taco concept. Why?

Apr 25, 2014 at 7:00PM

Yum! Brands (NYSE:YUM) delivered earnings this week, but the company's numbers weren't the lead story. Though Yum! showed investors that its Chinese market had recovered substantially from a multiyear struggle and ultimately beat earnings estimates, the headlines focused on one element far from the income statement. In an effort to compete in the quickly evolving fast-food and casual restaurant space, Yum! announced it would open a chain of premium taco joints -- like its Taco Bell restaurants, but not terrible. Is this the right move for a company that made its name from cheap and easy food, or an example of ill-conceived pseudo-innovation?

Plenty to celebrate
Yum! showed some top-shape earnings in its recent release, with the adjusted bottom line up 24% and a return to growth in the once-bright China segment. The company has a tremendous presence in the nation, but it was plagued by health issues and a PR nightmare surrounding its KFC chain. With 17% sales growth and 9% same-store sales growth in the just-ended quarter, it appears that Chinese customers are once again piling through the doors.

Management confirmed it is back on track to hit 20% EPS growth for the full year, helping justify the stock's relatively expensive 18 times forward earnings ratio.

What stole the show, though, was the announcement of U.S. Taco Co. -- an upscale concept readying to launch in the domestic market this summer, with the first location in Huntington Beach, Calif.

The concept
As opposed to Taco Bell, which is American food parading around as Mexican-inspired food, U.S. Taco Co. is American food admitting its own culture. The restaurant, with no drive-throughs to be had, will feature a variety of tacos starting at $4 each.

One question that has quickly arisen is whether this would cannibalize Taco Bell sales. The answer is easy: no. These are different markets and different concepts. Those ponying up $4 for a "premium" taco likely wouldn't visit a Taco Bell, because they think it's gross. While anyone in Southern California (ironically the home base of Taco Bell) would be quick to point out that some of the best tacos in the world are available on the street at half the cost, U.S. Taco Co. does have a place among higher-market, too-good-for-fast-food-but-not-really consumers.

Ultimately, the project is unexciting. This may be Yum!'s answer to Chipotle Mexican Grill (though U.S. Taco Co. will stick to tacos -- no burritos), but investors shouldn't expect similar growth for the chain. For one thing, the company is marketing the concept as premium tacos served with thick-cut french fries and milkshakes. The combination seems odd.

Luckily, management is taking things slowly, opening the first restaurant and seeing where things go.

The fast-food takeaway
Investors are best off keeping their eye on Yum!'s bread-and-butter, which is still fried chicken, pizza, and fake Mexican food. Management wants to double Taco Bell's sales by 2022. With the recent success the chain has seen, Yum! may very well hit its $14 billion goal. With double-digit gains in China and a laser-sharp focus on growing in emerging markets, this is a fantastic business. Let's just hope this foray into pop-foodie-ism isn't taking too much thought time up in the C-suite.

6 stock picks poised for incredible growth
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information