Yum! Brands, Inc. (NYSE:YUM) may have convinced Chinese diners to come back. After a chicken contamination scandal hit Chinese KFC restaurants hard last quarter Yum! warned that this problem could weigh on the company’s results for the entire year. Now, Yum! looks like it might recover from this scandal sooner. And KFC isn’t the only thing Yum!’s cooking up. Taco Bell has shaken up its menu, adding a new taco shell flavor and special afternoon offerings that could help drive traffic.
Yum! just released an 8-K that reported its restaurants’ February same store sales in China. KFC’s sales stayed the same, which was actually good news for investors worried about the chicken controversy. Yum! Brands, Inc. (NYSE:YUM)’s restaurant portfolio also paid off in February, because Pizza Hut attracted more Chinese diners even with the scandal hanging over KFC. Pizza Hut reported a 13% sales gain, helping Yum! overall rack up a 2% same store sales gain for the month in China. After the announcement came out, Yum! shares rose 6.3% higher after hours on March 11. China’s got Yum! investors’ attention right now, but the chain’s also got plans in the United States.
Taco Bell built on the success of its earlier Doritos tacos launch by rolling out Cool Ranch tacos. The fast food chain explained that its March 7 Cool Ranch launch topped off a successful social media marketing campaign. The Cool Ranch tacos help Taco Bell attract visitors by capitalizing on a popular PepsiCo, Inc. (NYSE:PEP) brand, so this product could actually help both companies. Taco Bell and Pepsi already work together to some extent, because Taco Bell serves Pepsi soft drinks at its restaurants. This successful partnership could lead to more crossover products, such as Pepsi snacks drawing from Taco Bell menu flavors.
Pepsi’s also a solid blue chip with expansion plans for China. The food and drink giant has developed a social media strategy that promotes Tropicana and Lay’s in China along with its cola drinks. The soft drink maker currently offers a 2.8% forward yield that surpasses Yum! Brands, Inc. (NYSE:YUM)’s yield of 1.9%, although Pepsi’s payout ratio of 54% also exceeds Yum!’s payout ratio of 35%. With $6.8 billion in free cash flow, Pepsi’s higher payout ratio isn’t a problem though. Pepsi’s forward P/E of 16 also comes out lower than Yum!’s figure of 18.
Taco Bell also wants to attract diners in the late afternoon. Restaurants and bars both often have dead time after the lunch rush, and one of the traditional solutions involves discounted drinks. Taco Bell doesn’t serve alcohol, but the chain still recognizes the popularity of the happy hour concept. Taco Bell’s Happier Hour page lists its afternoon specials, including blended ice drinks and three grillers, which the restaurant offers for a dollar each. These items seem similar to popular convenience store snacks, so Taco Bell might not be primarily competing with other quick service restaurants here. If Taco Bell does plan to go after convenience stores, its drive through lane could provide an advantage.
Sonic Corporation (NASDAQ:SONC) already attracts diners in the afternoon with drink discounts. Sonic lets diners pick out any drink it can make for half price, and the burger chain states that it can mix up 398,929 different drink combinations. Sonic reported 11.5% higher earnings last quarter, which suggests effective price management. In early 2013, Sonic expanded its happy hour selection by offering deals on a few snacks as well. Sonic Corporation (NASDAQ:SONC)’s move suggests that Taco Bell made a good marketing decision.
Sonic lacks the international reach that both Yum! Brands, Inc. (NYSE:YUM) and Pepsi have, but the burger chain could still be worth consideration. Sonic has a forward P/E of 15 and a PEG of 1.10. Yum! has limited room to grow domestically, which is why the chain has moved into China, while Sonic still hasn’t expanded throughout the entire United States yet. Sonic Corporation (NASDAQ:SONC) does lack a dividend, and its 6.8% profit margin doesn’t look very impressive compared to Yum!’s 11.7% figure.