Taco Bell's Star Begins to Fade at Yum as Sales Underwhelm

Updated on
  • The Mexican-inspired chain missed estimates in latest quarter
  • Yum has been relying more on Taco Bell since Chinese spinoff

Asia's Overfed Stock Rally Has a Yum Meal to Digest

Yum Brands Inc.’s Taco Bell division, a key source of growth for the fast-food giant, is showing signs of fading.

Same-store sales at the Mexican-inspired chain increased 4 percent last quarter, missing the 5.9 percent estimate of analysts. While that growth was still stronger than at Yum’s other divisions -- KFC and Pizza Hut -- those chains both came in ahead of projections.

The results raise concern for a company that’s been relying heavily on Taco Bell since the spinoff of its Chinese operations last year. The taco seller has had success in the U.S. with buzzy food items and a mobile-ordering application that has resonated with younger diners. Yum also is expanding the brand internationally, adding hundreds of restaurants in markets such as India, China and Brazil.

Yum shares fell as much as 2.3 percent to $74.83 after the results were released. The stock had gained 21 percent this year through the close of trading on Wednesday.

Earnings amounted to 68 cents a share in the second quarter, excluding some items. That beat the 61-cent estimate of analysts. But global same-store sales -- a key measure -- were a bit weaker than expected. They gained 2 percent, compared with an estimate of 2.2 percent, according to Consensus Metrix.

Tougher Competition

The U.S. market for Taco Bell has becoming increasingly saturated. Restaurants are relying heavily on promotions to get customers in the door, and lower prices at grocery stores -- following a record-setting run of food deflation -- has made it more attractive for many Americans to eat at home.

That’s why Yum is turning to international markets to help fuel Taco Bell’s growth. It opened its first location in the Netherlands earlier this year, and has said it will continue expanding in Spain, Guatemala, South Korea and the U.K. The global push is part of the chain’s previously announced goal of boosting annual sales to $15 billion by 2022 from $10 billion.

It plans to open at least 100 new locations each in China, Brazil, Canada and India. The target will help boost Taco Bell’s store count to 9,000 globally in the next five years, up from from 6,650.

In its home country, Taco Bell is remodeling locations and trying to build buzz with new urban eateries -- some of which even serve alcohol. The company expects to have more than 300 of those restaurants in the next five years.

At Pizza Hut, where sales have been declining, Yum is enhancing its digital-ordering features and adding more delivery drivers. While same-store sales dipped 1 percent last quarter, that was slightly better than the 1.5 percent drop estimated by analysts.

KFC, meanwhile, has had success with offbeat advertisements that feature a series of actors playing its Colonel Sanders character. The chain has also added new flavors of chicken like Georgia Gold that have drawn diners. KFC posted a same-store sales increase of 3 percent last quarter. That beat the 2.3 percent estimate and marked 12 straight quarters of U.S. growth.

(Updates shares in fourth paragraph.)
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