Yum! Brands' (YUM) Taco Bell Drafts Restaurant Growth Plan

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At its 2017 investor and analyst day, Taco Bell Corp. - a subsidiary of Yum! Brands, Inc.YUM - announced plans to add restaurants in the domestic market and also named four key international markets where it aims to remain focused to drive the growth momentum as a global brand.

We note that these initiatives are part of the brand's strategy to grow to $15 billion in annual global system sales by 2022, from the present $10 billion.

Inside the Headlines

Currently, Taco Bell operates over 6,650 restaurants in 23 countries. Notably, the brand plans to operate roughly 9,000 restaurants, in the next five years, in more than 40 countries. This will lead to the creation of 100,000 new jobs in the U.S. alone.

Taco Bell opened in excess of 600 net new restaurants (exclusive of license units) domestically, between 2012 and 2016. In 2017, the brand intends to perk up last year's growth rate. Meanwhile, on the international front, Taco Bell expects to open at least 100 restaurants in each of the following markets -- Brazil, Canada, China and India.

Domestic Expansion

In terms of domestic unit growth, Taco Bell has expanded into rural markets and has furthered its suburban penetration, by aptly managing building costs and design. Taco Bell now plans to enter greatly pedestrian urban areas that do not have room for drive-thru, in order to boost its latest development spree.

Given that urban markets entail a distinct approach for Taco Bell to stay pertinent for consumers and create a successful business model for its franchisees, the brand aims to make use of its inline and Cantina restaurant concepts, for these locations. Notably, these "inline" concepts are not dependent on a drive-thru, and thus allow Taco Bell to penetrate various new markets.

Cantina restaurants, a flashy restaurant brand aimed at millennials, is arguably the most prominent, in the fast food chain's new line of upscale restaurants. Facilities unique to Taco Bell Cantinas include digital menu boards, digital queues to monitor customers' order process, open kitchen, tapas-style menu of shareable appetizers and other amusements.

The first Cantina restaurant debuted in the Wicker Park neighborhood of Chicago in late 2015. Since then, 11 urban inline stores have opened in various cities, of which five are Cantina locations, meaning they serve alcohol.

By 2022, Taco Bell foresees at least 300 of the new locations to be urban inline restaurants in markets with enormous growth potential.

Meanwhile, last year, Taco Bell announced four new restaurant designs to reflect diverse community experiences. These included Heritage, Modern Explorer, California Sol and Urban Edge. We note that the four test locations debuted in California in 2016 and two more opened earlier this year.

Apart from focusing on the broader roll out of these designs, the brand remains committed on remodeling its existing stores. By the end of 2017, an added 350 restaurants are likely to be invigorated, bringing the total number to about 80% of the system.

Focus on International Markets

On the international front too, Taco Bell continues to gain momentum with new restaurant openings in various markets, given the growing enthusiasm for the brand and its improving economics.

With the recent opening in the Netherlands, Taco Bell presently has 350 restaurants in 22 countries outside the U.S.

By focusing its efforts on four key markets discussed above, that have billions of people and a compelling youth culture, Taco Bell aims to become a global powerhouse. Apart from these markets, Spain, Guatemala, South Korea and the United Kingdom are some of the international growth markets gaining scale.

Bottom Line

On Nov 1, 2016, Yum! Brands announced that it has spun off its all-important China division into an independent, publicly traded company Yum China Holdings, Inc. YUMC . Post the separation, shares of Yum! Brands have slightly underperformed the Zacks categorized Retail-Restaurants industry. While the industry gained 21.3%, the company's shares have rallied 18.9%.

Nonetheless, the company is leaving no stone unturned to subsidize the effects of the spin-off and revive business by driving growth at KFC, Pizza Hut and Taco Bell brands.

In fact, such robust restaurant development plan for the Taco Bell brand is also one such attempt in this direction. While the brand is exploring opportunities to amplify its penetration in underserved markets, domestically, it is assessing new markets to serve new customers internationally.

Going forward, continual focus on menu and digital innovation along with diversification of its development portfolio, is expected to fuel the brand's growth.

Zacks Rank & Stocks to Consider

Yum! Brands has a Zacks Rank #3 (Hold).

Some better-ranked stocks in this sector include Del Taco Restaurants, Inc. TACO and Darden Restaurants, Inc. DRI , carrying a Zacks Rank #2 (Buy) each. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

The Zacks Consensus Estimate for Del Taco's 2017 earnings climbed 1.9%, over the past 60 days. The company's earnings surpassed the Zacks Consensus Estimate in three of the last four quarters with an average beat of 5.69%.

Darden's earnings surpassed the Zacks Consensus Estimate in each of the last four quarters with an average beat of 3.35%. In fiscal 2017, earnings per share is expected to grow 12.9%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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