Yum! Nibbling Its Way Back to Dinner Tables

It is no secret that the restaurant industry, whether it is casual, quick-serve, or fine dining, felt the pain when consumers scaled back on eating out in response to the economy. But there are some signs, at least in the quick-serve sector, that business is gradually picking up.

Quick-serve (a.k.a."fast food") restaurant company Yum! Brands Inc. (NYSE: YUM) -- which operates and franchises Taco Bell, KFC, and Pizza Hut restaurants -- filed its fiscal first-quarter earnings Wednesday for the period ended March 24. Net income was up to $458 million on $2.3 billion in revenue. That compares with net income of $264 million on $2 billion in revenue for the year-ago period.

The company has more than 35,500 restaurants in about 110 countries. It opened more than 1,500 restaurants last year. including 656 of them in China, and plans on opening another 1,500 this year. In addition to China, Yum is focused on other emerging markets, including India, where it plans to increase its restaurants from 374 to 2,000 by 2020.

R.J. Hottovy, an analyst with Morningstar (Nasdaq: MORN), says Yum's quarterly results show prior fears of a slowdown in consumer spending in China, Yum's most profitable market, were overblown. He says high-income consumers in China who built their assets through real estate, for example, may have scaled back a bit on spending. However lower- to middle-income consumers, the demographic Yum targets in China, shelled out the yuan to eat out. "We see wage rates increase in [that] country and continue to prop up consumer spending at Yum's restaurants," Hottovy says.

The company also saw gains stateside in the first quarter with what Hottovy called better than expected results. "We had been saying for some time the company needs to make more aggressive turnaround initiatives," he says, "particularly with the KFC brand."

Yum!

Sales at Taco Bell rebounded, Hottovy notes, after struggling in 2011 amid class action lawsuits that questioned, among other things, whether the chain's meat was really beef. "It's nice to see them recover there. It bodes well for this year for the US business."

Hottovy attributed the first-quarter gains at Taco Bell to fewer external distractions as well as changes to the menu offerings. "The Doritos Locos Tacos [a regular Taco Bell beef taco with one giant Nacho Cheese Dorito chip forming the shell] seems to be doing very well." Other menu initiatives are in the pipeline as well for Taco Bell, including plans to roll out "Cool Ranch" flavored shells this year. Yum is testing breakfast offerings for Taco Bell in select markets with plans for a national launch expected in the coming quarters. Hottovy foresees Yum adapting the strategies that worked at Taco Bell to its other restaurant brands.

The positive direction Hottovy sees Yum moving in may also speak to growth in foot traffic for the overall quick-serve sector. "A lot of that stems from a general increase in consumer confidence among that group" of customers. However he cautioned that such positives for the dining market are put at risk by such factors as gasoline prices applying pressure on consumers.

Even with such issues at play, Hottovy sees the quick-serve market luring more customers back to their tables -- or in some cases the drive-through window. "In the back half of 2011, a lot of sales at quick-service restaurants were being driven by menu price increases," he says, "but this past quarter, traffic returned to being a bigger contributor to overall sales."