NEW YORK -- KFC and Pizza Hut may face some challenges amid the economic slowdown in China, but Taco Bell's changing menu in the U.S. is giving Wall Street some reason for optimism about Yum Brands Inc.
Over the past week, investors have been scared off by Yum's announcement that it expects a key sales figure in China to drop 4 percent in the fourth quarter, after rising 21 percent a year earlier. The company's stock fell 10 percent following the announcement last Thursday. While analyst reactions to the company's reassurances about China at its investor day Thursday were mixed, the overview of Taco Bell's future got positive reviews.
The U.S. business, which accounts for about a quarter of Yum's operating profit, has been a drag for the company for several years. While KFC and Pizza Hut remain challenged, Taco Bell has been delivering strong results.
In a presentation entitled "Boldly Ringing the Bell" on Thursday, Taco Bell CEO Greg Creed underscored how two new offerings are building the chain's customer base. To start, the popular Doritos Locos Tacos introduced earlier this year are improving perceptions about the brand among its core customers of young men, he said. Meanwhile, the introduction of higher-quality "Cantina Bowls," positioned as an alternative to more expensive competitor Chipotle, are bringing in more women.
Creed noted the two items are not just products, but new platforms that Taco Bell will continue to build on. In 2013, for example, the chain plans to introduce Doritos Locos Tacos in Cool Ranch and a spicy "Flamas" flavor.
"The runway for (Doritos Los Tacos) is massive," he said.
Creed also noted that its customer surveys showed perceptions about Taco Bell's quality were closing in on competitors such as Chipotle.
Next year, the chain will also work to attract more customers throughout the idea with a new snack menu, which will be marketed as "Happier Hour." And to spur new restaurant growth, Taco Bell is offering franchisees improved contract terms.
Baird Equity Research analyst David Tarantino kept his "Outperform" rating on Yum. Although investor sentiment is mixed given uncertainty in China, he noted the long-term prospects in emerging markets remain promising. He also noted that the company still expects to deliver profit growth of at least 10 percent in 2013, supported in part by Taco Bell.
Although the U.S. segment has a history of a choppy profit performance, Tarantino noted that Yum is increasingly optimistic about its ability to achieve profit growth of at least 5 percent in part because of new store openings. After nine years of declines, Tarantino noted Yum achieved net new store openings in the U.S. this year.
Over the next decade, he said Yum expects to double overall sales for Taco Bell, which accounts for 60 percent of U.S. operating profit.
Janney analyst Mark Kalinowski kept his "Buy" rating on Yum as well, based largely on its growth prospects outside the U.S. But he also noted that the Taco Bell plans to devote more marketing to national TV advertising could boost sales domestically.
Jefferies analyst Andy Barish kept his "Hold" rating on Yum, citing the slowdown in China. But in the U.S., he noted that Yum's incentives for Taco bell franchisees to build restaurants units could end up taking away market share from McDonald's Corp. and Chipotle Mexican Grill Inc.
Barish also noted that Taco Bell's new menu platforms could help "surprise investors" in the year ahead.
Yum's shares fell 84 cents to $66.08 in morning trading Friday, a day after posting gains during the analyst conference.
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Taco Bell Doritos Locos Taco
<strong>The Method:</strong> The one that started it all uses a proprietary taco shell-shaped Doritos chip as its wrapper, and comes swathed in a special cardboard holder to prevent Doritos powder from coating eaters' hands. <strong>The Verdict:</strong> Very positive reviews all around; most agreed that the tacos had been improved by the extra salt and savoriness of the Doritos shell. The biggest complaint was that there wasn't enough Doritos flavor -- it seemed as if the seasoning had been tamped down vis-a-vis the normal chips. To solve this problem, we tried adding more Doritos in the middle of the taco. It didn't help.
Cosi Signature Salad
<strong>The Method:</strong> We tossed crumbled Doritos into Cosi's signature salad, which contains mixed greens, gorgonzola and cranberries. <strong>The Verdict:</strong> Pretty solid! The chips added some much needed saltiness and crunch to what is usually a sweet, mushy salad. On the other hand, the signature Doritos flavor didn't really stand up to the salad's vinaigrette and ingredients; almost any chip would have improved the salad. In the words of one taster, "Since there is blue cheese in the salad, it feels like the two are competing for attention."
<strong>The Method:</strong> Since we were too bashful to ask our Chipotle assembly line wrapper to crumble the Doritos into the middle of the burrito, we ended up stuffing it ourselves ex post wrappo. <strong>The Verdict:</strong> Funny! But not good-tasting, sadly. One taster said that the pairing was "good texturally," but most agreed that the subtle, natural flavors of a Chipotle burrito clashed with the artificiality of Doritos.
Wendy's French Fries
<strong>The Method:</strong> Grind the chips into a powder, then shake them up with the fries to coat them evenly. <strong>The Verdict:</strong> Possibly the worst of the pairings. One taster compared them to "dry cheese fries," while another noted that, "Ketchup does not go with Doritos." Blech!
McDonald's Big Mac
<strong>The Method:</strong> Added whole Doritos on top of both the burger's beef patties. <strong>The Verdict:</strong> Bravo! Most tasters agreed that this was almost as good a match as Eddard and Catelyn Stark on "Game of Thrones." (Full disclosure: they did not use a "Song of Ice and Fire" analogy to convey their enthusiasm.) One said, "The creamy sauce complements the crunchy texture of the chips," which, another added, "makes it more satisfying, because usually it's one-dimensional."
McDonald's Chicken McNuggets
<strong>The Method:</strong> We stuck Doritos into the McNuggets, as our photographer put it, "like shards of glass." <strong>The Verdict:</strong> These were divisive. Some tasters hated the combo, finding the McNugget flavor and texture overpowering. But others said that dipping the Doritos-adorned nuggets into barbecue sauce made for a revelatory melding of flavors.
Subway Spicy Italian Sub
<strong>The Method:</strong> Lay whole chips right up in the middle of the sub. <strong>The Verdict:</strong> One of the better matches. One taster even called it "delicious," noting that salami and Doritos have mutually beneficial flavor profiles. Another taster, though, quipped that, "This does not taste discernibly different because normally when I eat a Subway sandwich I'm also stuffing Doritos in my face." (It's not clear that this was a criticism.)
Dunkin' Donuts Glazed Donuts
<strong>The Method:</strong> Because we had three donuts, we decided to try a few things... we stuck them in as with the McNuggets, we stuffed them in the middle as with the Big Mac and we sprinkled their crumbs on top as with the Wendy's Fries. <strong>The Verdict:</strong> Another divisive dish. Though one taster praised the Doritos donuts for their "nice cheesecake taste," others picked up artificial, bitter flavors that they said ruined the meld. Everyone thought they LOOKED awesome though!