Ads, Menu Changes Boost Sales for O.C.’s Taco Bell, CKE

A new taco with a soft shell and TV commercials starring a talking Chihuahua are bringing customers back to Irvine-based Taco Bell Corp. and parent Tricon Global Restaurants Inc. Indeed, snazzier advertisements, innovative menu items and renovated buildings are breathing new life into sales and earnings at several older chains, including Tricon, McDonald’s Corp. and Brinker International Inc., the parent of Chili’s.

“They’ve redone their menus and other things to get people into seats,” said Ken Zschappel, a senior portfolio manager at Aim Advisors Inc.

And Anaheim-based CKE Restaurants Inc., which owns the Carl’s Jr. hamburger chain, has been giving its Hardee’s restaurants a face lift, converting many to a new concept called Star Hardee’s that combines popular items from both chains.

The increase in customers and low prices for commodities like beef are expected to more than triple the restaurant industry’s per-share earnings in the fourth quarter, according to First Call Corp. That’s the best performance of any industry group, topping the 138% gain at long-distance phone companies, the No. 2 group.

Tricon, owner of the KFC, Pizza Hut and Taco Bell chains spun off from PepsiCo Inc. in October 1997, is a prime example. It has closed unprofitable locations, introduced products such as stuffed-crust pizza and spent more on promotions.

Tricon, the No. 2 restaurant chain after McDonald’s, is expected to earn 66 cents a share in the fourth quarter, compared with a loss of $2.39 a year earlier. And the roll-out of new products, including a chicken sandwich at KFC, could boost sales next year.

Last month, Darden Restaurants Inc., the largest casual-dining company, said fiscal second-quarter net income more than doubled to $15.9 million, or 11 cents a share. Sales at its Red Lobster restaurants open at least a year rose 5.4% as Darden revamped the menu, updated the chain’s look and started new ads.

CKE is bringing back the charcoal-broiled hamburger to its Hardee’s fast-food chain in hopes that the old-style cooking method will revive sales.

Sales at Hardee’s locations open at least a year are still lower, but are expected to rise by this year. Earnings are expected to rise to 39 cents in the fiscal fourth quarter from 26 cents a year earlier.

McDonald’s already is touting the benefits of its new “Made for You” cooking system, scheduled to be in all 12,500 U.S. restaurants this year. The system is expected to deliver hotter and fresher food made to a customer’s order.

“People don’t want to go to an old, worn-out concept that gives the impression the food is worn out,” said Patrick Schumann, an Edward Jones analyst.

McDonald’s is expected to earn 64 cents a share in the fourth quarter, up from 58 cents.

At the same time, restaurants are slowing U.S. expansions as markets become saturated and to free up money to fix older locations.

“The unit supply and demand trade-off has become more favorable,” said Joseph Buckley, a Bear Stearns & Co. analyst. “Almost across the board, same-store sales are up.”

Reduced competition is allowing restaurants to raise prices. Though Diageo Plc unit Burger King Corp. keeps several items on its menu at 99 cents, the burger giants have avoided price wars.

“In the fast-food world, there’s been less discounting, and in full service, everybody’s managing the check up” by adding desserts and more beverages, Buckley said.

Lower food costs also are fattening profit margins. “Commodity savings are really what’s driving profit levels,” said Dean Haskell, an Everen Securities analyst whose top stock picks include Brinker, Ruby Tuesday Inc. and Steak n Shake parent Consolidated Products Inc.

Haskell, who estimates that hamburgers account for a quarter of the business at many fast-food chains, expects them to get a 5% earnings boost in the quarter from reduced beef costs.