"At Taco Bell, we're very pleased with the initial results of our national breakfast launch," stated David Novak, CEO of Yum! Brands (NYSE:YUM), in the Yum! Brands earnings release. One slight problem: that's exactly what Novak stated three months prior, almost verbatim. At some point it's time for Yum! Brands to stop calling it "initial results" and accept that Taco Bell's breakfast may not the game changer it hoped.
Giving Yum! Brands Taco hell
I apologize for giving Yum! Brands hell regarding its Taco Bell breakfast launch. I was actually quite excited about it originally and was really impressed by its advertising. However, when I actually went to try it, I was so bummed out you might have thought Yum! Brands stood me up for the prom.
It then didn't take me long to speculate that the breakfast idea would be a flop as even the originally clever advertising seemed to make a turn in the wrong direction. Then there was the clincher - during the April 23 conference call, Yum! Brands CFO Pat Grismer stated, "Taco Bell's year will be more of a first half, second half story as we continue to build momentum with this exciting brand."
To say Taco Bell will be a second half story while the company is still in the first half said loud and clear to me that the first half is a dud and the breakfast flopped at least for now. And by all accounts that seems to be true.
The most important meal of the day is the least to Taco Bell
Yum! Brands reported its fiscal second quarter results on July 16. Its Taco Bell division reported system-wide sales increase of 3%. U.S. same-store sales bumped up 2%. Was I the only one who popped in and tried breakfast?
Consider this: in the first quarter, same-store sales declined 1%. Yum! Brands stated during the first quarter conference call that the severe weather negatively affected Taco Bell same-store sales by 3%. This means, excluding the weather impact, Taco Bell same-store sales rose by 2%.
Where's the shredded beef?
In other words, based on percentage year-over-year growth, it appears the breakfast didn't make a lick of difference in sales. The adjusted growth rate for Taco Bell was identical in both quarters despite breakfast being available just before the start of the second quarter.
Perhaps those who came in for breakfast were regulars during lunch and dinner who figured once a day is enough - in other words breakfast may have cannibalized lunch and/or dinner.
Maybe the idea of breakfast turned off some lunch customers. Perhaps by diverting resources away from promoting lunch and dinner, breakfast sales gained, but less focus on lunch and dinner meant those times suffered. Who knows?
Either way it really doesn't look good for Yum! Brands and its franchisees to be spending more money keeping the units open for more hours and not realizing any obvious gains in sales.
Robbed Peter to pay Paul
During the second quarter conference call, Novak spilled the breakfast beans. 7% of Taco Bell sales came from breakfast. Ah ha! Lunch and dinner did suffer. Novak added, "Now the big question you are probably asking is this: given the success of the breakfast launch, why did same store sales increase only 2% in the quarter?" He must have read my mind.
Novak explained, "Keep in mind that during the first two months of the quarter, our immediate emphasis was almost totally on breakfast." Well, then. Yes, Yum! Brands sold some Taco Bell breakfasts but did so at the expense of its other snacks and meals throughout the day.
Breakfast did little more than cannibalize the sales from other day parts. That's not "success" quite yet. Maybe even some people were like me - after trying the quality-challenged breakfast I didn't even want to think about Taco Bell for any other meal.
I'm not saying there is no hope for Taco Bell's breakfast but so far it appears to be a big disappointment. Novak stated, "We said all along the Taco Bell would be a first half second half story." Let's see what Yum! Brands can do for the rest of the year with Taco Bell. If it's still a dud, I would seriously consider counting Taco Bell breakfast out of any long-term forward analysis.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.