3 Ways Yum! Brands Is Pushing Back

Yum! Brands had a rough couple of years. However, three news stories show the company is finding its footing.

May 5, 2014 at 10:00AM

Yum! Brands (NYSE:YUM) has had a busy couple of weeks. The owner of Pizza Hut, Taco Bell, and KFC released a mixed first-quarter report. However, the report showed a vital segment improvement. Yum! also announced its next CEO, rolled out a new restaurant concept, and responded to controversy about its beef ingredients. This is an important rebound time for Yum! following a year of terrible comps. The next moves could make the company stronger competition for McDonald's (NYSE:MCD) and Wendy's. However, what do investors need to know now?  

Taco Bell Breakfast

Source: Taco Bell

The freshest news came with the appointment of Taco Bell head Greg Creed as the new CEO. Creed oversaw major Bell launches including the Doritos Locos Tacos and the new breakfast menu and he will succeed departing CEO David Novak on the first of next year.

This move shows the continued importance of the Taco Bell brand, which has put in some of the best comparable-store sales of the Yum! chains in recent years. However, the new CEO was only the icing on the cake -- or the hot sauce on the taco -- of the recent Yum! announcements.

Here are three key recent stories from Yum! Brands. 

1. First-quarter China comps up 9% 
The company reported first-quarter revenue of $2.72 billion, while analysts had expected $2.79 billion. EPS came in at $0.87, which beat the estimate for $0.84. However, the most important news came from the China segment. 

Yum!'s global comps have suffered over the past year thanks to double-digit drops in the China segment, which accounts for about half of the company's overall revenue.

The drops stemmed from a KFC controversy in late 2012 when Chinese officials investigated the hormone levels in chickens supplied to the chain. KFC later vowed to improve quality control and cut ties with over 1,000 suppliers. However, the scandal -- and subsequent outbreaks of avian flu -- kept comps down in the region.

The first-quarter report showed a surprising and much-needed improvement in the segment. Comps were up 9% compared to a 20% drop in last year's quarter. System sales were also up 17% and operating profit rose 80% year-over-year. 

2. New fast-casual restaurant from Taco Bell 
Yum! plans to branch out the Taco Bell family with the higher-end, fast-casual U.S. Taco Co. and Urban Taproom. The first U.S. Taco location will open soon in California with more locations to follow across the country. 

The U.S. Taco menu will offer premium tacos with ingredients that include lobster, carne asada steak, and country-gravy smothered fried chicken -- though those items, thankfully, don't all appear in the same taco. Sides include thick-cut french fries and beverages include milkshakes in both traditional and alcohol-spiked versions.

According to National Restaurant News, the taco prices will start at $4 with the average check expected to total over $11. Taco Bell checks average $7.20. So U.S. Taco has the potential as a big moneymaker -- if the restaurant catches on. That's a wait and see story, but the company's decision to even take the risk shows initiative to move past the sluggish performance of the past couple of years.

And while we're on the subject of Taco Bell....

3. Taco Bell's meat is only 88% beef  
Yum! chain Taco Bell made headlines last week due to its website breakdown of the ingredients in its beef -- only 88% of it is actual beef. Will this become the Bell's answer to McDonald's "pink slime" controversy?

"Pink slime" is a nickname for ammonia-hydroxide-treated beef trimmings that were popularly used as a filler. The USDA-approved trimmings became the cause du jour in the spring of 2012 and public outrage turned on grocery stores and fast-food restaurants. McDonald's received a lot of the attention and later announced that it would cease using the trimmings in its burgers, while Wendy's ran ads bragging about its 100% beef, slime-free burgers. It was another major PR ding for McDonald's ingredients following the documentary Super Size Me.

Is Taco Bell heading for a controversy of similar nature? It's not great that the meat is only 88% beef but that's expected when Taco Bell's average menu price point is considerably lower than that of Wendy's.

Taco Bell also took a bold stance in setting up a webpage that plainly spells out the 12 additional ingredients that are added to the beef, including common questions asked about the ingredients.  Also, the products listed are nothing overly concerning to anyone who eats packaged foods regularly. The chemicals named mostly act as flavorings, colorants, or binders.

Foolish final thoughts 
Yum! seems on the road to finding its footing after the KFC debacle in China. The U.S. Taco move could self-destruct if the concept doesn't find an audience. However, even pursuing the project evokes confidence in a climate where McDonald's is simply trying to get its own menu figured out. 

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Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. 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.

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