NEW YORK (AP) — KFC and Pizza Hut may face some challenges amid the economic slowdown in China, but Taco Bell's evolving 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 warning 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 dropped 10 percent on the announcement, and executives scrambled to emphasize their confidence in the region at its investor conference Thursday. While the reactions were mixed to the reassurances, the overview of Taco Bell's future was met with more positive reviews.
The U.S. business accounts for about a quarter of Yum's operating profit, but has been a drag for the company for several years. KFC and Pizza Hut remain challenged in the U.S., but Taco Bell is 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 higher-quality "Cantina Bowls" 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 Mexican Grill Inc.
Next year, the chain will also work to attract more customers throughout the day 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. Despite the uncertainty in China for the near term, he noted the long-term prospects in emerging markets remain promising. He also noted that Yum 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 the Louisville, Ky., company 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.
Barish also noted that Taco Bell's new menu platforms could help "surprise investors" in the year ahead.
Yum's shares fell 80 cents to $66.12 in afternoon trading Friday, a day after posting gains during the analyst conference.