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Yum! Brands Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: July 24, 2012 06:10AM
Yum! Brands Inc. (YUM) filed Quarterly Report for the period ended 2012-06-16.
Highlight of Business Operations:Build Leading Brands in China in Every Significant Category – The Company has developed the KFC and Pizza Hut brands into the leading quick service and casual dining restaurants, respectively, in mainland China. Additionally, the Company owns and operates the distribution system for its KFC and Pizza Hut restaurants in China which we believe provides a significant competitive advantage. Given this strong competitive position, a growing economy and a population of 1.3 billion in mainland China, the Company is rapidly adding KFC and Pizza Hut Casual Dining restaurants and making progress with the emerging restaurant concepts of Pizza Hut Home Service (pizza delivery) and East Dawning (Chinese food). Additionally, on February 1, 2012 we acquired an additional 66% interest in Little Sheep Group Limited ("Little Sheep"), a leading casual dining concept in China,which brought our total ownership to 93% of the business. Our ongoing earnings growth model in China includes double digit percentage unit growth, system sales growth of at least 13%, same-store sales growth of at least 5% and moderate leverage of our General and Administrative (“G&A”) infrastructure, which we expect to drive Operating Profit growth of 15%.
Under the equity method of accounting, we previously reported our 27% share of the net income of Little Sheep as Other (income) expense in the Consolidated Statements of Income. From the date of the acquisition, we have reported the results of operations for the entity in the appropriate line items of our Consolidated Statement of Income. We no longer report Other (income) expense as we did under the equity method of accounting. Net income attributable to our partner's ownership percentage is recorded as Net Income - noncontrolling interest. Little Sheep reports on a one month lag and, as a result, their consolidated results are included in the China Division from the beginning of the quarter ended June 16, 2012. The consolidation of Little Sheep increased China Division revenues by 4% and 2% for the quarter and year to date ended June 16, 2012 versus the prior year periods, respectively. Other than the $74 million non-cash gain discussed above, the consolidation of Little Sheep was not significant to Operating Profit or Net Income - YUM! Brands, Inc. for the quarter and year to date ended June 16, 2012. We expect the consolidation of Little Sheep to increase China revenues by approximately 4% in 2012. We do not expect any significant impact to Operating Profit for the remainder of 2012 from the consolidation of Little Sheep compared to the income we recognized under the equity method of accounting when our ownership was 27% in 2011.
Changes in foreign currency exchange rates ("FX rates") positively impacted the translation of our foreign currency denominated Operating Profit in our China Division by $6 million and $18 million for the quarter and year to date ended June 16, 2012, respectively, while FX rates negatively impacted Operating profit in our YRI Division by $5 million and $8 million for the quarter and year to date ended June 16, 2012, respectively.
Includes a 1% and 6% negative impact for YRI and the U.S., respectively, related to the divestiture of the LJS and A&W brands and a 4% positive impact for China related to the acquisition of Little Sheep. Combined these items had a 2% net negative impact for Worldwide system sales for the quarter ended June 16, 2012.
Includes a 1% and 5% negative impact for YRI and theU.S., respectively, related to the divestiture of the LJS and A&W brands and a 2% positive impact for China related to the acquisition of Little Sheep. Combined these items had a 2% net negative impact for Worldwide system sales for the year to date ended June 16, 2012.
Stocks Discussed: YUM,