* Dropped lawsuit over beef hits occasional diners
* Taco Bell same-store sales fell 5 percent in 2nd qtr
* Parent Yum working to stabilize business, revive growth
By Lisa Baertlein
LOS ANGELES, July 14 Yum Brands Inc (YUM.N)
expects damage from a dropped lawsuit over the quality of Taco
Bell's ground beef to linger in the third quarter, but to ease
during the remainder of the year, and laid out plans to turn
the business around.
Taco Bell is Yum's most profitable U.S. brand. A sharp
decline in closely watched same-restaurant sales, along with
higher-than-normal commodity inflation, resulted in a 28
percent decline in U.S. operating profit for the second
A California woman in January sued Taco Bell over the
contents of its seasoned beef. Taco Bell responded by saying it
planned to take legal action against the "false statements"
being made about its food. In April, the woman voluntarily
dismissed her lawsuit. [ID:nN25182344] [ID:nN19290074]
But the damage was done. Taco Bell sales at established
restaurants, which were up 2 percent in the fourth quarter of
last year, were flat in the first quarter and tumbled 5 percent
in the second quarter ended June 11.
"The negative sales that resulted from the lawsuit have
lasted longer than any one of us thought," Chief Executive
David Novak said on a conference call with analysts.
Novak said Taco Bell's light users, who stopped visiting
after the lawsuit made headlines, have been surprisingly
difficult to bring back.
"We expect slow improvement from the low point in the
second quarter," said Novak, who added that it usually takes
about six months to fully recover from food quality-related
To that end, Chief Financial Officer Rick Carucci told
analysts to expect another decline in same-restaurant sales for
the current quarter.
"Taco Bell will be negative in the third quarter but not as
bad as the 5 percent" in the second quarter, Carucci said.
The executives said Taco Bell would announce new products
this year and roll out "more compelling" advertising in a bid
to improve results.
We "are determined to turn around these unacceptable
results. Believe me, all hands are on deck," Novak said.
CHINA SHINES, U.S. LAGS
Yum, which also owns the KFC and Pizza Hut brands, is one
of the biggest fast-food restaurant operators in the United
But its U.S. business has been a persistent laggard
compared with Yum's operations in China and other international
markets -- which combined generate 75 percent of Yum's
On Wednesday, Yum raised its full-year earnings forecast
and posted better-than-expected second-quarter results on
strength in China and its other international markets.
While same-restaurant sales for China were up 18 percent in
the quarter and rose 2 percent in its other international
markets, they fell 4 percent overall in the United States on
declines at Taco Bell, Pizza Hut and KFC.
The company said it expects U.S. profit performance to
improve by the fourth quarter.
While the second-quarter should mark a bottom for Taco
Bell, "Yum's U.S. business takes the 'prize' for the worst
performing restaurant business we know of," JP Morgan analyst
John Ivankoe said in a client note.
Nevertheless, Janney Capital Markets analyst Mark
Kalinowski said Yum's U.S. results are not a bellwether for the
rest of the fast-food industry.
"While these numbers are poor, we do not believe they are
indicative of a worsening U.S. quick-service sector overall,"
Michael Yoshikami, chief executive and founder of YCMNET
Advisors, said Yum rival McDonald's Corp (MCD.N) was once in
Yum's shoes, with strong emerging market growth and
same-restaurant sales problems in the United States.
McDonald's turned it around by moves including expansion of
its low-price Dollar Menu and the introduction of coffee and
other beverages, he said.
"They're going to have to figure out a way to revitalize
their domestic menu," said Yoshikami, who owns McDonald's
shares and closely monitors Yum results.
Yum shares were up 1.5 percent at $56.39 on Thursday
afternoon, while the broad S&P 500 Index .SPX was down 0.4
(Reporting by Lisa Baertlein, editing by Matthew Lewis)