Can the Quesarito Save Taco Bell?

Taco Bell's new Quesarito is the latest menu item that Yum! Brands (NYSE: YUM  ) is counting on to boost sales. Over the last few years, Taco Bell has introduced several new items, from the Cantina Bell menu to Doritos Locos Tacos and even a breakfast menu. It introduced all of them with the hope of capturing customers from Chipotle Mexican Grill (NYSE: CMG  ) . Unfortunately, nothing has been working. As a matter of fact, Taco Bell saw its sales drop in the most recent quarter and is now even losing business to Qdoba Mexican Grill, owned by Jack in the Box (NASDAQ: JACK  ) . Can the Quesarito turn things around for Taco Bell and Yum! Brands?

Source: Wikimedia Commons

What is a Quesarito?
Taco Bell describes the Quesarito as "a quesadilla and a burrito rolled into one." It has become a permanent menu item at all U.S. locations starting on June 9. The Quesarito contains premium Latin rice, Chipotle sauce, and reduced-fat sour cream and comes with either beef, shredded chicken, or steak. These ingredients are then wrapped in a grilled quesadilla with melted cheeses.

Source: foodbeast.com

According to Chris Brandt, the Chief Marketing Officer for Taco Bell, the Quesarito is Taco Bell's best-selling menu item in a test market since Doritos Locos Tacos were tested. Any comparison to Doritos Locos Tacos for Taco Bell is a great sign. Since it introduced Doritos Locos Tacos in March 2012, Taco Bell has sold more than 825 million of them.

The problem is that it's already on Chipotle's secret menu
While Taco Bell is beating Chipotle to the punch in terms of actually putting the Quesarito on its menu, it's been a secret menu item for quite some time at Chipotle. However, not everyone knows about it since you have to ask for it. A Chipotle Quesarito consists of a layer of cheese sandwiched between two burrito shells and then put in the warmer. Then you can add whatever fresh Chipotle ingredients you like.

Source: Chipotle Mexican Grill

Where Taco Bell does beat Chipotle is in terms of price. Prices for Taco Bell's Quesarito range from $1.99 for seasoned beef to $2.99 for steak. Chipotle's Quesarito prices have run from $6.65 to $11. However, Taco Bell has not been able to get Chipotle customers to trade down. Chipotle customers remain loyal and refuse to sacrifice Chipotle's freshness for Taco Bell's lower prices.

The results speak for themselves, but there is hope for this quarter
In the first quarter, Taco Bell reported that system sales were flat. The chain benefited from a 1% increase in units, but that was offset by a 1% drop in same-store sales. Taco Bell's restaurant margin decreased 2.6 percentage points to 15.6% and total operating profit decreased 16%.

Source: Yum! Brands

Yum! Brands is counting on improvement in its second quarter. Taco Bell remains an important part of Yum! Brands and contributed 21% of Yum! Brands' total operating profit last year. The second quarter should see a sales boost from Taco Bell's new breakfast menu, which was launched on March 29. If the new Quesarito is a hit, it could provide an added boost before the second quarter ends later this month.

How are Chipotle and Qdoba doing?
Chiptole and Qdoba both reported stellar first-quarter numbers in their most recent quarters. Chipotle saw revenue increase over 24% and same-store sales rise a staggering 13.4% in its first quarter. Chipotle opened 44 new restaurants in the quarter and this brought its total restaurant count to 1,637.

Qdoba saw same-store sales rise 7% systemwide in its most recent quarter. Qdoba benefited from the mid-February introduction of its Queso Bliss promotion with two new flavors, Diablo and Verde. The restaurant chain also saw double-digit growth in its catering business.

How do the shares compare?

 

Jack in the Box

Chipotle Mexican Grill

Yum! Brands

Market Cap

$2.40B

$17.65B

$35.16B

Forward P/E

22.24

35.57

18.93

Return on Equity

22.67%

22.77%

47.06%

Operating Margin

11.25%

16.37%

16.07%

1 Year Return

59.26%

56.12%

8.80%

Dividend Yield

1.3%

N/A

1.9%

Source: Yahoo! Finance

In the past year, shares of Yum! Brands have not performed as well as shares of Jack in the Box and Chipotle. With a lower forward price/earnings ratio and a higher dividend yield, shares of Yum! Brands could rebound if some of its initiatives pay off and boost sales. Even though Yum! Brands is a bigger company than Jack in the Box or Chipotle, it has the highest return on equity among the three and about the same operating margin as Chipotle.

Foolish final thoughts
While it's too early to tell what impact the new Quesarito will have for Taco Bell, I have to commend Taco Bell's management for continuing to innovate. Yum! Brands is about to see this innovation companywide when Taco Bell's CEO becomes the new CEO of Yum! Brands next year. While Taco Bell's results haven't been great lately, I think the new breakfast menu and the Quesarito will help boost same-store sales going forward. I'll be eagerly awaiting Yum! Brands' second-quarter earnings report to see just how much of an impact these initiatives had on the company.

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