Leading all of this was Taco Bell’s exceptionally strong performance, which offset significant weakness at Pizza Hut. Taco Bell same-store sales were up a whopping 8% and foot traffic was up 5%, which is extremely impressive for a mature brand in a stagnant industry like fast food. It’s also worth noting that Taco Bell is almost exclusively an American brand, as it has very little in the way of an overseas presence. So the bump can’t be attributed to a recovery overseas. This is very much a domestic American story.
So, even though older fast food brands have lost ground to higher-end “fast casual” chains like Chipotle (CMG) over the past decade, Taco Bell has managed an impressive comeback.
Yum – and particularly its Taco Bell brand – has really followed the lead of McDonald’s (MCD) in shaking up its menu, which had gotten a little stale. Just as McDonald’s introduced all-day breakfast and other assorted menu items, Taco Bell launched its Naked Chicken Chalupas in which the taco shell is actually made out of fried chicken.
While that sounds a little like Frankenstein’s monster, it’s been a major success, likely due to its novelty appeal.
Going forward, Taco Bell is looking to compete at the higher end with the likes of Chipotle while also continuing to offer cheap offerings for a dollar or two. It’s ambitious, but it seems to be working.
Taco Bell currently makes up about a third of Yum’s operating profits and has the best longer-term growth potential due to its smaller international footprint.
All of that is the good news. The bad news was Pizza Hut’s results. Same store sales were down 3%… and 7% in its US locations. That’s particularly sobering considering that Dominos Pizza and Papa John’s both had very decent quarters.
Sometimes, brands just get stale. Yum spend a lot of money refreshing KFC, and they’re attempting to do the same with Pizza Hut, pledging to spend $130 million helping its franchisees update their locations and improve their technology.
It’s needed badly. Dominoes mobile ordering is a fine-tuned machine, whereas Pizza Hut’s has been generating a lot of customer complaints.
Charles Lewis Sizemore, CFA is the principal of Sizemore Capital Management.