It’s Time to Double Down on Yum! Brands

This article was published on April 29, 2014. Click here to see The Motley Fool's latest coverage of Yum! Brands, including an April 8, 2016, look at whether YUM or MCD is the better buy.  

Yum! Brands (YUM 0.39%) looks poised to increase sales at all three of its brands: KFC is bringing back the Double Down, Taco Bell has a new breakfast menu, and Pizza Hut has WingStreet. Yum! Brands is certainly not afraid to try new ideas, which illustrates management's ability to overcome adversity, especially after the challenges the company faced in China over the last few quarters.

Considering that Yum! Brands has more than 40,000 restaurants globally compared to McDonald's (MCD -0.90%) 35,000 locations, can these new menu items help Yum! Brands catch up to McDonald's in total sales?

Solid first-quarter results
In the first quarter, Yum! Brands posted earnings per share of $0.87, $0.02 better than expected and $0.17 higher than last year's first quarter. While total revenue rose 7.1% year over year to $2.7 billion, it was still lower than the $6.7 billion in revenue that McDonald's recorded in the same quarter.

Source: Yum! Brands

In terms of same-store sales growth, the China division led the way with a 9% increase. KFC saw a 1% rise in same-store sales; Pizza Hut recorded a 2% decrease, and Taco Bell saw a 1% decline in same-store sales.

McDonald's first quarter was not that great
For McDonald's, the first quarter was a disappointment. Even though same-store sales rose 0.5% globally, they were down 1.7% in the U.S. First-quarter earnings per share were $0.03 lower than expected and $0.05 lower than last year. Total revenue was just 1% higher than last year.

McDonald's expects April's global same-store sales to be positive as the weather improves. McDonald's blamed the weather for the sales weakness it experienced in the first quarter. This year, McDonald's plans to open 1,500 new restaurants.

New menu items expected to boost sales for Yum! Brands
Yum! Brands is counting on new menu items from KFC, Taco Bell, and Pizza Hut to boost sales. If the new menu items can drive traffic into its stores, Yum! Brands hopes to capture sales that ordinarily would have gone to a competitor like McDonald's.

For KFC, the company is looking for the KFC Double Down to boost sales like the item did when it was first introduced back in 2010. In its first month, KFC sold more than 10 million Double Downs. The Double Down is certainly a unique menu item. It consists of bacon, Monterey Jack cheese, and the Colonel's sauce between two 100% white meat KFC chicken fillets.

Source: KFC

Pizza Hut is looking for new Garlic Parmesan Pizza and Buffalo wings from WingStreet to increase sales. I think WingStreet has potential for Pizza Hut, and I discussed the possibilities in "Can Pizza Hut's WingStreet Take Down Buffalo Wild Wings? Here's Why It Matters." The new Garlic Parmesan Pizza comes in three distinct flavors for $10 -- Chicken Bacon Tomato, Roasted Veggie, and Five Cheese.

Taco Bell's focus has been on its new breakfast menu and going head-to-head with McDonald's during breakfast hours. The new breakfast items include Cinnabon Delights, Waffle Tacos, Breakfast Burritos, A.M. Crunchwraps, and A.M. Grilled Tacos. Taco Bell has also launched an aggressive marketing campaign to raise awareness. According to Yum! Brands CEO David Novak, Taco Bell's breakfast is "off to a great start."

Source: Taco Bell

What about McDonald's menu?
To fend off the challenge from Taco Bell and its new breakfast menu, McDonald's offered a free small McCafe coffee and advertised the McGriddle to go up against Taco Bell's Waffle Taco. A McGriddle consists of two small pancakes made with maple flavoring; it comes in three varieties -- Bacon, Egg, and Cheese McGriddles, Sausage McGriddles, and Sausage, Egg, and Cheese McGriddles. The big advantages that McDonald's has during the breakfast hours are that the chain has been running its breakfast menu the longest, and McDonald's has become part of the daily routine for most consumers. This is the biggest challenge Taco Bell faces and explains the aggressive advertising push.

How do shares compare?

Source: Yahoo! Finance

Foolish final thoughts
I like the moves Yum! Brands and its CEO David Novak are making. He knows that innovative menu items are needed to help drive traffic, and he is focused on boosting sales at KFC, Taco Bell, and Pizza Hut. This year, he expects to deliver 20% earnings-per share growth. With shares trading at 18 times next year's earnings, I think shares of Yum! Brands are set to deliver for shareholders.