Yum! Brands (YUM) is coming after rival Chipotle Mexican Grill (CMG). A Taco Bell located in the Wicker Hill community of the Windy City will offer alcoholic beverages as part of the company’s broader re-imaging plan to appeal to the masses.
YUM isn’t stopping at the booze, which will be available to locals this summer.
Taco Bell is also adding a row of lime green bar stools where customers can sip beer, wine or frozen mixed drinks with a burrito while looking out to the restaurant’s kitchen in a new open floor plan against the backdrop of an exposed brick structure, a makeover that’s being rolled out at urban-market locations.
The move is the fast-casual chain’s latest attempt to appear less like … well, a fast-food joint, in the hopes of appearing more upscale.
Yum Brands has never shied away from change when it comes to its Taco Bell franchise, and this latest expansion into booze is no exception. But is there hope for Yum Brands beyond mimicking rival CMG?
Let’s take a look at the prospects for YUM stock.
Yum Brands Still Innovating
The expansion into alcohol is only Yum’s latest move to boost performance at its Taco Bell location. Only days ago, Yum announced plans to remove artificial colors and flavor in ingredients in addition to trans fats at Taco Bell by year-end.
Don’t worry, though — the Doritos Locos Taco won’t be affected by the plan. The Doritos Locos Taco was a smash hit, jump-starting same-store sales to double digits a few years ago, and no doubt Yum Brands is hoping to do the same with beer and wine. (Importantly, however, drinks are dine-in only.)
Not that Taco Bell’s same-store sales are too shabby, evidenced by the 6% increase in the first quarter. Yum Brands attributed the growth to innovation and the addition of a breakfast menu.
Alcohol is a high-margin business, particularly if the company plans to offer craft beers, which have been known to fetch margins in the 25% to 30% range. And Taco Bell has already been enjoying operating margin and profit expansion.
Granted, Yum Brands is only targeting a single U.S. Taco Bell location for the new drinks menu (plus a handful located internationally), but that’s not such a bad strategy. It will give Yum Brands time to see the way customers respond and it will also build up anticipation at Taco Bell locations around the country.
Financials
YUM stock isn’t cheap, trading at 40 times trailing earnings, which rivals Chipotle’s valuation at about 39 and is about double that of fast-food competitor McDonald’s (MCD). It’s also worth noting that YUM stock is cheaper than CMG on a forward-P/E basis — Yum Brands trades at 22 times forward earnings, vs. 29 for Chipotle.
And according to analysts at JPMorgan, YUM has room to run. The firm lifted Yum’s rating to “overweight” and upped the price target to $108 a few weeks ago. YUM shares are currently hovering at about $90 per share.
Yum Brands is showing plenty of growth right now, with no plans of slowing down. Taco Bell is taking risks and expanding its menu, which will likely pay off in sales, especially if Yum decides to pursue a larger geographic roll-out of the drinks menu.
Bottom Line for YUM Stock
Yes, you can criticize Taco Bell for being in the shadow of Chipotle, following the chain’s move toward healthier ingredients. In fact, Chipotle already sells margaritas at several locations, although alcohol sales haven’t been anything to write home about. But the option for drinks does add to the atmosphere — it’s not blindly copying Chipotle’s every move — and Taco Bell continues to surprise its customers for the better.
Yum stock is up 24% year-to-date compared to about a 10% decline in CMG stock. So maybe Yum Brands is having the last laugh, at least in the short term.
The decision to expand into alcoholic beverages is a no-lose situation for Taco Bell and YUM stock. Yum isn’t investing a ton of capital for the Chicago liquor license, but adding alcohol is sure to lift sales at Wicker Hill and could eventually spill over to other Taco Bell locations around the country.
If you like CMG stock, you have to like YUM stock here. It may be a little pricey, but you’ll collect a 1.8% dividend yield as the company and returns continue to grow.
As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.
