Lawsuit still hurting Taco Bell, Yum says

Taco Bell has drawn praise inside and outside the restaurant business for the way it handled a lawsuit loudly proclaiming its ingredients to be crap. The measure sought to block the chain from calling describing the content of its tacos and burritos as ground beef, arguing that there was more filler than meat in the mix.

Taco Bell’s aggressive response, waged in ads and a publicity campaign, prompted the plaintiff quietly to drop the suit earlier this week. But the chain’s franchisor acknowledged yesterday that considerable damage has been done.

“Our positive sales momentum was reversed when we were thrown a curveball with the false claim around our food quality,” David Novak, the CEO of parent company Yum! Brands, told financial analysts.

He asserted that “heavy users” of Taco Bell continued to frequent the chain as the lawsuit (and Taco Bell’s response) generated headlines in the major media. But “light users” stopped visiting and have yet to resume their earlier levels of patronage, Novak said.

“We do not expect the second quarter in the U.S. to get better,” added CFO Rick Carucci. “We have not yet been able to reverse the negative sales trend at Taco Bell.”

Analysts seemed skeptical of the assessment.

“I'm a little surprised that Taco Bell has weakened as it's gotten away from the lawsuit,” said Jason West of Deutsche Bank. “Do you think there's any other issues going on out there with the [quick-service restaurant] consumer and that are new any way in terms of gas prices or whatever it may be?”

Gas prices haven’t helped, acknowledged Carucci. But the publicity stirred up by the lawsuit was the determining factor, he contended. Taco Bell’s same-store sales were running about 4% above the year-ago tally before the story broke. Bad weather tempered that in some areas, but the decline wasn’t early as severe as what happened after the lawsuit became widely known.
If anything, he added, the damage was probably mitigated by the promotion of a shrimp-filled taco for Lent.

“We just need a little bit of time to get further away from the event,” said Carucci, as quoted in a transcripted posted by SeekingAlpha.com.

“We just don’t know how long it’s going to take us,” added Novak.

He assured the analysts on the call that the situation would not affect Taco Bell’s plans to add breakfast and remodel its stores.
“Better not,” he stressed.

The call just about coincided with Taco Bell’s announcement that it wanted a public apology from the Alabama law firm that had handled the lawsuit.

The Yum executives indirectly explained why. The attorneys had stirred up as much publicity as they could when the suit was filed and was still alive. But they very quietly withdrew it, leaving ample chatter still underway.

Taco Bell apparently wants the firm to publicly renounce its actions and to make some publicity about it withdrawal of suit.

There was no mention during the call of Long John Silver's or A&W, the restaurant brands Yum is trying to sell.