Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

Taco Bell's nacho cheese may be delicious, but don't let it induce such a food coma that you forget its operator, Yum! Brands Inc., still has a mess in the kitchen. 

Not So Yummy
Yum! Brands has under-performed the overall market since an activist campaign began in May 2015
Source: Bloomberg

Yum shares rose 3 percent on Wednesday after the company reported financial results that exceeded Wall Street's expectations. 

Snack Attack
Strong sales growth at Taco Bell could be masking weakness at Yum! Brands' other restaurant chains
Source: Bloomberg

But the sales gains were pretty much all fed by an 8 percent year-over-year sales jump at Taco Bell, which has been killing it with on-point advertising and new products such as the chili cheese taco and the Naked Chicken Chalupa, essentially a deep-fried chicken chip used to dip into a tub of cheese.

Yum's other restaurants aren't as hot.

Quarterly sales are still steadily falling at Pizza Hut, which has struggled to keep diners from defecting to better-performing rivals such as Domino's Pizza Inc. The drop is even more astonishing when you consider how pizza joints have managed to buck the trend of general sales weakness among restaurants in the past year. Meanwhile, sales growth slowed for the second quarter in a row at KFC, though growth has steadied after years of investment in reviving the brand. 

KFC continues to consistently lose fast-food market share, while Taco Bell gains it: 

Portion Control
While Taco Bell's market share is growing, KFC's is shrinking and Pizza Hut's has remained flat
Source: Euromonitor

It's worth noting that the outperformance of Taco Bell, which blew past sales expectations, wasn't enough to get Yum to raise its full-year sales guidance. Keeping its estimate of 2 percent to 3 percent overall global sales growth suggests the company isn't prepared to bet Taco Bell's performance will be sustainable, or enough to overcome sales declines at its other divisions. 

All of this provides more evidence for spinning off Taco Bell, which I've argued would be better off on its own. Yum has already successfully spun off its China business, spurred by pressure from activist investors such as Keith Meister's Corvex Management and Dan Loeb's Third Point. Meister stepped down from the Yum board in February.  

Or, as an alternative, Yum could get rid of Pizza Hut and KFC and focus on growing Taco Bell, which is only now entering international markets and has plenty of promise. 

Instead, though, it seems Yum is sinking resources into its poorest-performing business, Pizza Hut. Most of the company's earnings call on Wednesday was about plans to fix the pizza chain, including compelling franchisees to market the brand and upgrade locations. But Yum management said a full turnaround will take years to complete.  

Shareholders might not want to stick around and wait for that to happen.

Since Corvex's activist campaign began two years ago this week, Yum shares have gone pretty much nowhere. Meanwhile, the S&P 500 restaurant index has jumped 25 percent and the S&P 500 has increased 13 percent.

Hungry For More
Analysts are a lot more positive about Yum! Brands than the stock market is
Source: Bloomberg

Despite this lackluster performance, the shares remain pricey, trading at 23 times forward earnings, compared to an average of 17 over the past two years.

With chains such as McDonald's Corp. and Domino's delivering much more appetizing growth, restaurant investors considering Yum based on the promise of Taco Bell alone might want to explore other options. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. He still holds 5.97 percent of the company's shares, but hasn't added to his position since 2015. 

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net