Introducing new menu items
During the quarter, Yum! Brands (YUM) rolled out new menu items at KFC (Kentucky Fried Chicken). KFC China will have a total of eight new products over the next three months. New product introduction and product refresh is a strategic initiative to increase customer traffic. In Pizza Hut China, the company introduced sizzling fajitas.
In contrast, Chipotle Mexican Grill (CMG) rarely introduces new products. Its marketing strategy is more focused on its quality ingredients—it doesn’t use artificial ingredients. Chipotle found success in this strategy. It attracts a younger audience that likes to eat high quality food at a premium price.
To benefit from operating leverage, Yum! Brands is also offering the breakfast menu at Taco Bell. During the quarter, the breakfast menu accounted for 6% of Taco Bell’s product mix. This strategy isn’t new. McDonald’s (MCD) has also been offering breakfast to optimize its sales leverage. The Consumer Discretionary Sector ETF (XLY) holds 4% of McDonald’s and 3% of Starbucks (SBUX).
- Management stated that it expects the second quarter EPS (earnings per share) to lag by 20% YoY (year-over-year). It expects full-year EPS growth of 10% in 2015. Analysts expect an adjusted EPS decline of 12% in 2Q15.
- The full-year same-store sales expectations for China will likely be 3%–7%.
- By end of the year, the company will increase its premium coffee offering to 2,500 KFC outlets from 1,300 outlets.
- Management expects the growth in 1H15 to be negative. However, it stated that 2H15 will be stronger—driven by the China division.
- Full-year margins from China are expected to be at 16%. Management expects double-digit growth in this division.
Considering the guidance provided above, let’s see how investors reacted to the earnings announcement.