Updated to include more information on Pizza Hut and KFC following earnings call.
NEW YORK ( TheStreet) -- The fast food breakfast wars between McDonald's (MCD - Get Report) and Yum Brands' (YUM - Get Report) Taco Bell division are raging in the U.S., and may heat up further this year given Taco Bell's recent sales success.
"We are far from done innovating in breakfast by a long shot -- Taco Bell has an innovation pipeline that is very robust," said Yum Brands representative Jonathan Blum.
Taco Bell launched its breakfast menu nationally on Mar. 27 last year with the Waffle Taco and easy-to-hold A.M. Crunchwrap. That menu, available from 7 a.m. to 11 a.m., has expanded to 16 items.
The chain long known for dishing out tacos and burritos to hungry late-night customers recently garnered attention for unveiling four versions of a biscuit taco, with sausage, eggs and honey dressing wrapped in a folded biscuit. At the same time, Taco Bell has poked fun at McDonald's breakfast standard bearer, the Egg McMuffin, in several high-profile TV commercials.
Breakfast now makes up roughly 6% of Taco Bell's business, compared with 25% for McDonald's U.S. operation. Consumers' increasing awareness of Taco Bell's breakfast menu, which also includes egg and cheese-filled burritos, helped make the division the standout performer for Yum Brands in its better-than-expected first quarter.
Taco Bell's same-restaurant sales rose 6% for the second consecutive quarter, a solid result that came despite inclement weather, which hurt traffic at restaurants from fast casual Chipotle (CMG - Get Report) to sit-down eatery Brinker International (EAT - Get Report).
Earnings came in at 80 cents a share, outpacing the 72 cents a share consensus forecast. Shares surged 5% in after-hours trading Tuesday and were up 3.7% in premarket trading Wednesday.
During the quarter, Taco Bell also released $1 crunchwrap sliders filled with beef and nacho cheese, the triple steak stack (steak and cheese served in a long flatbread) and a spicy queserito stuffed burrito.
Investor enthusiasm over Taco Bell's performance overshadowed another solid quarter for KFC in the U.S., which notched a 7% same-store sales improvement. Demand for KFC's new $5 fill-up bowls, released last summer, continued to be the main sales driver. The bowls take aim at price-conscious, calorie-counting millennials that tend to order salad and burrito bowls from the red-hot Chipotle (CMG - Get Report).
Yum Brands said it will experience no operational impact from an outbreak of avian flu that has caused some 5.3 million chickens to be euthanized to prevent the spread of the disease.
"None of the outbreaks have affected our supply chain at all, we don't receive our supply from any of the farms infected," Blum said. Blum pointed to KFC's practice of cooking its chicken at high temperatures. He also said the U.S. Department of Agriculture had said that properly cooked chicken is still safe to consume. For these reasons, consumers may not flee the brand amid the negative headlines, Blum said.
At Yum's China division, which includes 4,800 KFC locations, same-store sales declined 12% as it continued to deal with a food-quality scare last year that hurt consumer perception of the brand. In 2014, same-restaurant sales in China declined 5%.
Yum Brands has undertaken several measures this year to right the ship in China.
"We launched at the end of March the first of what will be two menu revamps this year -- we'll have eight new products, both for lunch and dinner," said Blum about KFC China. In addition to traditional products in the chicken category, KFC China will launch healthier items such as herbal tea and seafood.
These additions will join a premium coffee line that was added to KFC China's menu in Shanghai in December. Now available in 10 cities and 1,300 KFC China locations, the coffee is priced at about 40% and 20% discounts to coffee sold at competitors Starbucks (SBUX - Get Report) and McDonald's, respectively. "Coffee should add a solid sales layer," said a Yum Brands executive on a Wednesday earnings call.
As for Pizza Hut's China business, which counts 1,800 plus restaurants, Yum Brands plans to continue with a breakfast rollout and home delivery services, which are available at about 300 of the units. About half of the products available for Pizza Hut's home delivery service in China will be Chinese food, according to the company.
Blum noted that surveys Yum Brands conducts on customer satisfaction continue to show improvement, suggesting sales in China later this year could be noticeably better than recent trends.
Meanwhile at Pizza Hut, the chain's celebration of 20 years of stuffed crust pizza during the NCAA "March Madness" basketball tournament may not have been enough to sustainably revive sales. The division, which represents roughly 60% of Yum's 13,000 plus total units, served up a 1% same-restaurant sales decline in the first quarter. Last year, sales dropped 3%. Execs say they believe sales at Pizza Hut "could remain soft" in the near-term.
The prolonged sales sluggishness for Pizza Hut even after unwrapping a new menu in November featuring millennial-friendly artisanal crusts, sauces and toppings, continues to be a source of disappointment for the company.
"Unfortunately, we haven't been as effective as we'd like with our marketing," said Blum. "Frankly, our competitors have just done a better job at differentiating themselves and their offerings."
One of those competitors, Domino's Pizza (DPZ - Get Report), continues to have sales success as it has played up its online and mobile ordering platforms even as its menu has largely stayed the same over the past two years. Sales at Domino's Pizza in the U.S. increased 7.5% in 2014. And Papa John's (PZZA - Get Report) and privately owned Little Caesars continue to attract customers with their competitive pricing during promotional periods.
According to Blum, Yum Brands plans to address Pizza Hut's lagging performance this year with improved digital marketing and online ordering capabilities. But he conceded, "we've got work to do."