With Taco Bell and McDonald’s Fighting Over Breakfast, the Real Winner Might Be IHOP

As Taco Bell and McDonald's look to destroy each other to win breakfast customers, IHOP's sales are growing.

Jun 28, 2014 at 8:00AM

As McDonald's (NYSE:MCD) and Taco Bell, which is part of Yum! Brands (NYSE:YUM), engage in a war of words over breakfast, the real winner might just be IHOP, which is owned by DineEquity (NYSE:DIN). Ever since Taco Bell introduced its new breakfast menu, its advertising campaign has gotten very personal. Part of its campaign includes real people named Ronald McDonald touting Taco Bell's new breakfast menu as their choice for breakfast.


Source: Taco Bell

However, the problem is that neither McDonald's nor Taco Bell are posting rising sales. For the month of May, McDonald's same-store sales fell 1% in the U.S. In the first quarter, Taco Bell's same-store sales dropped 1%.

Mcdonalds Egg Mcmuffin

Source: McDonald's

It's a different story for IHOP. In the first quarter, same-store sales increased 3.9% at IHOP. With its menu centered around pancakes and breakfast, customers look to be ditching both Taco Bell and McDonald's and heading over to IHOP. After all, why go to McDonald's or Taco Bell when IHOP has more than 65 different and signature made-to-order breakfast items?


Source: IHOP

IHOP has come a long way since the the first IHOP was built in 1958. Its buttermilk pancakes and chocolate chip pancakes have been on its menu since day one. Today, the restaurant chain serves more than 700 million pancakes and 100 million cups of coffee each year. In honor of its 56th anniversary, IHOP is offering a short stack of its famous buttermilk pancakes for only $0.56 on July 8 from 7 a.m. to 7 p.m.

A strong first quarter for DineEquity
IHOP's strong results offset the weakness from DineEquity's Applebee's restaurants. Applebee's same-store sales declined 0.5% in the first quarter. Overall, DineEquity's net income increased from $1.14 per share last year to $1.26 per share this year. Between Applebee's and IHOP, there are more than 3,600 restaurants in 19 countries.

IHOP adding new menu items
This summer, IHOP has added three new sets of pancakes to its menu. Guests can now get Strawberry Banana Cream Pie Pancakes, Raspberry Peach Pancakes, and Blueberry Cannoli Pancakes. They're available separately or as part of one of IHOP's combo meals: Ultimate Bacon & Sausage Combo, Ham & Eggs Combo, Bacon & Eggs Combo, or a Sausage & Eggs Combo.


Source: Wikipedia

In addition to new breakfast offerings, IHOP has added new lunch and dinner items. New items include the Citrus Chicken Pecan Salad, Crispy Chicken Cobb Salad, Honey-Lime Chicken Salad, Spicy Chicken Ranch Sandwich, Turkey Berry Melt, and a Southwestern Club Sandwich. There are also new drink flavors available until July 20: Iced Tea Lemonade, Orange Tangerine Iced Tea Lemonade, and Cherry Blackberry Lemonade.

What's the game plan for Taco Bell and McDonald's?
Taco Bell's plan is to grab a piece of McDonald's breakfast business. McDonald's is the industry leader when it comes to breakfast, with a 31% market share. This part of the day accounts for about 20% of its U.S. sales. Taco Bell is counting on its new breakfast menu and national advertising campaign to steer customers away from McDonald's and into its restaurants. The new breakfast menu from Taco Bell is pretty creative--its new Waffle Taco and A.M. Crunchwrap are both certainly unique.

I'll be eagerly awaiting Yum! Brands' next earnings report to see if the new breakfast menu moved the needle on same-store sales. McDonald's, on the other hand, is counting on its customers sticking to their routines and continuing to make McDonald's breakfast a part of their daily routines. Breaking daily routines is perhaps the toughest job that Taco Bell has in driving customers into its restaurants for breakfast. Commuters typically follow a pattern during their morning commutes.

How do shares compare?
For investors, shares of DineEquity are worth a closer look. Over the past few years, the company has moved away from owning its restaurants and toward franchising. As a result, it has a higher operating margin than McDonald's or Yum! Brands at 36%. Yum! Brands has an operating margin of only 16%, and McDonald's is at 30%. Furthermore, DineEquity's forward price/earnings multiple of 15 is lower than both companies, and its dividend yield of 3.7% is higher than Yum! Brands or McDonald's.

Foolish final thoughts
They say breakfast is the most important meal of the day. For IHOP, Taco Bell, and McDonald's, breakfast is the difference between growing sales and losing sales. Right now, IHOP looks to be winning that battle, as it's the only one of the three posting same-store sales growth. I think that trend is set to continue, and it is why investors should start paying closer attention to IHOP and its parent DineEquity.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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