Yum Brands Needs Taco Bell's Strength To Outshine China Food Worries

Aug.19.14 | About: Yum! Brands, (YUM)

Summary

Food safety issues will hit China division sales.

Taco Bell continues to market well against rivals and expand menu offerings.

Taco Bell same store sales among best for company.

Strength at Taco Bell leading to increased franchising power of brand.

Yum! Brands (NYSE:YUM) continues to be in the news for its China food safety issues. While these issues will no doubt have an impact on the China division's sales, the rest of the company is showing signs of strength. Taco Bell continues to be the gem in the portfolio and along with expanding store counts can carry the company in the face of investor worry.

Taco Bell launched its Dollar Cravings menu on Monday in a strong marketing program that takes on McDonald's and other rivals. McDonald's made big headlines last year when after ten years it decided to shift away from its $1 menu offerings. After pressure from franchisees, McDonald's changed its menu to the Dollar Menu & More, offering items at $1, $2 and $5 price points.

Taco Bell's Dollar Cravings menu has 11 items that are all $1. This includes beef and chicken options and features popular items like burritos, tostada, nachos, roll-ups, and empanadas. The goal of the new menu is to gain some traffic back from the key 18-24 age group, who has likely shifted to trendier and healthier options like Chipotle Mexican Grill and Qdoba.

Taco Bell continues to show strength for Yum! Brands with its Cantina menu, dollar menu offerings, and expansion into breakfast. All of these items are also helping boost the number of franchised locations opening. The Cantina menu was updated in July to the newly named Cantina Power, with new offerings in the breakfast category and items like greek yogurt being added.

Taco Bell posted a 3% increase in second quarter sales, led by same store sales growth of 2%. This was the biggest increase of the three United States brands for same store sales growth. Taco Bell continues its trend of same store sales growth. Thirty Taco Bells were opened during the second quarter, with 29 of the total being franchised locations.

Taco Bell continues to be a gem in the portfolio, as it made up 21% of Yum! Brands operating profit in fiscal 2013. The strength of the brand is leading to an increase in franchisor demand, which is also helping the company sell some of its company owned locations to franchisees. A boost to traffic from Millenials from the new dollar menu could improve same store sales and once again increase the overall value of owning a Taco Bell chain.

Yum! Brands second quarter sales increased 6% and overall margins improved. China sales were up 21% on strong unit growth and a 15% improvement in same store sales. A total of 104 stores were added in China during the second quarter, bringing the overall count to 6387 at the end of the quarter.

The scandal involving OSI Group has forced all KFC and Pizza Hut locations in China to stop selling meat. OSI also supplies to rivals like McDonald's and Burger King. The company has provided meat to McDonald's since 1992 and Yum! Brands since 2008. This will have a big impact on Yum! Brands China division in the third and fourth quarter and will be the story to watch. Analysts may come in with new price targets and investors may sell off on third quarter weakness or comments made by management. A decline in shares after third quarter earnings could provide a great entry point for long term investors.

Analysts see Yum! Brands growing earnings per share to $3.56 for the full fiscal year. That would be a 20% improvement on last year's $2.97. For fiscal 2015, analysts see earnings jumping to $4.09 per share. This marks expected growth of 15%. The company's goal is 25% earnings per share growth from 2015 on, so there is the possibility of a strong beat on the $4.09 figure, depending on how long the China issues last.

Shares of Yum! Brands trade around $72 a share, well below the 52 week high of $83.58. Shares also yield 2.1% at current share prices, offering investors a small return while waiting for the turnaround. Yum! Brands survived a similar scare years ago with chicken that was boosted with injections.

Yum! Brands is one of the largest quick service restaurant companies in the world. Don't let the China worries keep you from investing in this great company. Thousands of restaurants are being added in emerging markets every year. The company is also seeing strength in the United States despite an industry decline.

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