Decoding Yum’s earnings report

Hearing executives recount Yum! Brands’ recent financial performance, you’d think the restaurant giant left competitors in a quandary about whether they should even remain in business. But cut through the hype and a different impression takes form, particularly in regard to the company’s wheezing domestic operations.

Consider, for instance, the bombshell revelation that Taco Bell’s blockbuster Doritos Locos Tacos line is fizzling. The most recent iteration, a ranch-dressing-flavored version filled with chicken, “underperformed versus our expectation,” CEO David Novak acknowledged during Yum’s quarterly conference call with analysts.

“We believe that ended up being too much of a niche product to overlap the 15 percent growth we've had over the past few years with the introduction of Doritos Locos Tacos and then Cool Ranch, two of the most popular product introductions in the history of our entire category, not just Taco Bell,” Novak said.

He jumped from there to teasing previews of possible future blockbusters for Taco Bell, Yum’s domestic workhorse. Sales boosters already in the works include remote ordering and extensions of the Mexican chain’s new breakfast menu.

Novak all but genuflected when he mentioned Taco Bell’s entry into breakfast, calling it “a day that’ll go down in history.” Yet the sales figures he disclosed were eyebrow raisers for the wrong reasons. Based on introductory sales results, the morning menu should generate annual sales of $70,000 to $120,000 per unit, Novak revealed. That translates into daily sales of as low as $192 per day, or as high as $329.

Novak said the new menu accounted for 7 percent of sales during the first full quarter it was available systemwide, but acknowledged at another point that the chain’s emphasis “was almost totally on breakfast” for two of the period’s three months. Indeed, he cited that fixation as one of the reasons Taco Bell’s same-store sales increase was held to 2 percent during the full quarter, even with the introduction of breakfast.

He hinted at further expansion of the morning line-up, and said franchisees were gung-ho about entering a daypart where McDonald’s was enjoying sales of $1 million before most Taco Bells even opened their doors.

Novak couldn’t sugarcoat the situation at Pizza Hut, noting that operating profit will fall “well short of our initial expectations” because of problems with domestic operations. He assured investors that “a number of major initiatives” will be undertaken during the fourth quarter to revive the business.

“Our plan is to launch a major new advertising positioning along with the innovation designed to better connect with millennials and separate us from competition,” said Novak, citing Pizza Hut’s new cookie dessert as a preview of what’s to come.

Novak also revealed that Yum is already harvesting insights from Super Chix, the fast-casual start-up the company opened in Dallas as what it describes as an experiment. One feature being scrutinized is the “small box format” of the store. He suggested that smaller formats could figure in the future into Yum’s core brands.


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