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Yum! Brands Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: October 16, 2012 11:00AM
Yum! Brands Inc. (YUM) filed Quarterly Report for the period ended 2012-09-08.
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%.
During the fourth quarter of 2011 we sold the Long John Silver's and A&W All American Food Restaurants brands to key franchise leaders and strategic investors in separate transactions. During the quarter and year to date ended September 3, 2011, we recognized $17 million and $86 million, respectively, of pre-tax losses and other costs primarily in Closures and impairment (income) expenses as a result of our decision to sell these businesses. Additionally, we recorded $53 million of tax benefits in the quarter ended September 3, 2011 related to these divestitures. In the full year 2011, these businesses contributed 5% to both system sales and Franchise and license fees and income for the U.S. segment, and 1% to both system sales and Franchise and license fees and income for the YRI segment. While these businesses contributed 1% to both the U.S. and YRI segments' Operating Profit in full year 2011, the impact on our consolidated Operating Profit was not significant.
Changes in foreign currency exchange rates positively impacted the translation of our foreign currency denominated Operating Profit in our China Division by $5 million and $23 million for the quarter and year to date ended September 8, 2012, respectively, while foreign currency exchange rates negatively impacted Operating profit in our YRI Division by $12 million and $21 million for the quarter and year to date ended September 8, 2012, respectively.
For both the quarter and year to date ended September 8, 2012, system sales growth includes a 1% and 5% negative impact for YRI and the U.S., respectively, related to the LJS and A&W divestitures and a 3% 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 both the quarter and year to date ended September 8, 2012. For the quarter ended September 8, 2012, YRI system sales were also estimated to be negatively impacted by about 1% due to the timing of Ramadan.
U.S. Operating Profit increased 13% and 22% in the quarter and year to date ended September 8, 2012, respectively. The increases in the quarter and year to date ended September 8, 2012 were driven by the impacts of same store sales growth and new unit development, partially offset by higher G&A expenses.