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Financial Analysis Report (FAR) YUM! Brands, Inc. The fast food and quick service restaurant industry consisted of about 945,000 restaurants representing approximately $552 billion in annual sales. The industry is highly fragmented, with the top 50 companies holding about 25% of industry sales and is intensely competitive with respect to food quality, price, service, convenience, location and concept (Hoovers 2009). The major companies of the industry include McDonald’s, Burger King, Subway, Domino’s Pizza, Dairy Queen and the Yum Brands restaurant companies.
Quick service restaurants are often affected by changes in consumer tastes; national, regional or local economic conditions; currency fluctuations; demographic trends; traffic patterns; the type, number and location of competing food retailers and products (Yum! Brands website, 2009). The profitability of individual companies within the industry depends on efficient operations, effective marketing and ingenious business strategy (Hoovers 2009). Knowing the way the industry fluctuates, in January 1997 PepsiCo announced its decision to spin-off its restaurant businesses to shareholders as an independent public company.
Effective October 6, 1997, PepsiCo disposed of its restaurant businesses by distributing all of the outstanding shares of Common Stock of TRICON Global restaurants to its shareholders. Then on May 16, 2002, the Company changed its name from TRICON Global Restaurants, Inc. to YUM! Brands, Inc (Yum! Brands website, 2009) Yum! Brands, Inc. , based in Louisville, Ky. , is the world’s largest restaurant company in terms of system restaurants with more than 36,000 restaurants in over 110 countries and territories. In terms of overall industry performance, Yum!
Brands, Inc. is second only to McDonald’s restaurant. The Company’s Common Stock trades under the symbol YUM and is listed on the New York Stock Exchange (“NYSE”). They were ranked #239 on the Fortune 500 List, with revenues in excess of $11 billion in 2008. I believe the reason for this outstanding performance can be attributed to the multi-branding strategy the company has adopted. A multi-brand strategy involves the marketing of two or more similar and usually competing products by the same parent company that typically involves different brands. Four of heir restaurant brands: KFC, Pizza Hut, Taco Bell and Long John Silver’s are the global leaders of the chicken, pizza, Mexican-style food and quick-service seafood categories. Yum consists of three operating segments: U. S. (KFC-U. S. , Pizza Hut-U. S. , Taco Bell-U. S. , LJS/A&W-U. S. ), International (Yum! Restaurants International) and China Division (includes mainland China, Thailand and KFC Taiwan). In 2008, Yum opened more than four new restaurants each day of the year, outside of the United States, making them the largest retail developer in the world. (Yum!
Brands website, 2009) The U. S. segment consists of five individual operating brands. A brief description of each company is listed below: 1. Kentucky Fried Chicken (KFC)- KFC was founded in Corbin, Kentucky by Colonel Harland D. Sanders, an early developer of the quick service food business and a pioneer of the restaurant franchise concept. The Colonel perfected his secret blend of 11 herbs and spices for Kentucky Fried Chicken in 1939 and signed up his first franchisee in 1952. KFC is based in Louisville, Kentucky. As of year end 2008, KFC was the leader in the U.
S. chicken QSR segment among companies featuring chicken-on-the-bone as their primary product offering, with a 44 percent market share in that segment, which is more than three times that of its closest national competitor. 2. Pizza Hut-The first Pizza Hut restaurant was opened in 1958 in Wichita, Kansas, and within a year, the first franchise unit was opened. Today, Pizza Hut is the largest restaurant chain in the world specializing in the sale of ready-to-eat pizza products. Pizza Hut is based in Dallas, Texas. As of year end 2008, Pizza Hut was the leader in the U. S. izza QSR segment, with a 15 percent market share in that segment. 3. Taco Bell-The first Taco Bell restaurant was opened in 1962 by Glen Bell in Downey, California, and in 1964, the first Taco Bell franchise was sold. Taco Bell is based in Irvine, California. As of year end 2008, Taco Bell was the leader in the U. S. Mexican QSR segment, with a 54 percent market share in that segment. 4. Long John Silver (LJS)- The first LJS restaurant opened in 1969 and the first LJS franchise unit opened later the same year. LJS is based in Louisville, Kentucky. As of year end 2008, LJS was the leader in the U.
S. seafood QSR segment, with a 35 percent market share in that segment. 5. A & W- A&W was founded in Lodi, California by Roy Allen in 1919 and the first A&W franchise unit opened in 1925. A&W is based in Louisville, Kentucky. A&W operates in 10 countries and territories throughout the world. As of year end 2008, there were 363 A&W units in the U. S. , and 264 units outside the U. S. All single-brand units inside and outside of the U. S. are operated by franchisees. As of year end 2008, there were 89 company operated multi-brand units that included the A&W concept.
With the multi-brand strategy, Yum has also found a way to achieve a competitive advantage over its competitors by way of globalization. Through globalization, Yum Brands can be found in over 100 countries. The International and China Division segments can account for over 60% of the company’s total operating profits in 2008 and 50% of Yum Brands’ growth comes from their China division. This aggressive growth has allowed the company to still be able to give 2 billion dollars back to their shareholders through share repurchases and dividends, despite the drop in sales from the U.
S. segment due to the current economic situation in the U. S. (Yum! Brands website, 2009). The explosive growth in China and other key developing countries via the Yum! Restaurants International segment has enabled Yum Brands to capture a huge market share in the quick service restaurant industry, thus making them the largest restaurant company of that industry (Yum! Brands website, 2009). [pic] Yum! Brands, Inc. is considered a Large Cap company with a market cap of 16. 16 billion. The company currently has 461. 59 million shares outstanding and a float of 459. 4 million. The float percentage is 99. 58. This large float percentage makes this company more attractive to investors as it shows that the stock price is more stable. The greater the number of shares available for trade, the less volatility the stock price will show since it becomes harder for a smaller number of shares to affect the price. 79. 30% of the stock is owned by institutions and . 41% is held by insiders. Many of the insiders that hold Yum Brands stock would include the top executives (See appendix A for executive bios) and the Board of directors.
Below is a list of the Yum Brands Board of Directors: The Board of directors for Yum Brands, Inc. David C. Novak Director since 1997 | Chairman of the Board, Chief Executive Officer and President, Yum! Brands, Inc. Samuel Su Director since 2008 | Vice Chairman of the Board and President of Yum! Brands China Division David W. Dorman Director since 2005 | Chairman of the Board and Chief Executive Officer of AT&T Massimo Ferragamo Director since 1997 | Chairman of Ferragamo USA, Inc. J. David Grissom Director since January 2003 | Chairman, Mayfair Capital Bonnie Hill
Director since March 2003 | Chairman, B. Hill Enterprises LLC Robert Holland, Jr. Director since 1997 | Industry Partner, Cordova, Smart & Williams, LLC Kenneth G. Langone Director since 1997 | Founder, Chairman of the Board, Chief Executive Officer and President, Invemed Associates, LLC Jonathan S. Linen Advisor to the Chairman of American Express Thomas C. Nelson Appointed Effective January 26, 2006 | Chairman, President & CEO of National Gypsum Company Thomas M. Ryan Director since 2002 | Chairman, President and Chief Executive Officer, CVS Caremark Corporation
Jackie Trujillo Director since 1997 | Chairman Emeritus, Harman Management Corporation Robert D. Walter Director since May 2008 | Founder and Executive Director of Cardinal Health, Inc. Of note, only two of the board members are actual Yum Insiders (David Novak and Sam Su; the Chairman and Vice Chairman of the board respectively). Yum has found a great way to align the goals of both management and the owners. I think that this organizational structure helps to avoid the agency problem that may occur in large corporations.
By having board members that are not also insiders of the company as well as compensating the top executives with stock options will ensure that management acts in the best interest of the stockholders since they are also stockholders themselves. Some key developments and major events for Yum! Brands, Inc. that have been announced or filed through the Securities and Exchange Commission (SEC) using Forms 8 or 10 within the past 52 weeks include: • May 29, 2009- Announced the results of its cash tender offer to purchase up to $150,000,000 aggregate principal amount of its 7. 700% Senior Notes due July 1, 2012- A dividend of $0. 9 per share of common stock, which will be distributed August 7, 2009, to shareholders of record at the close of business on July 17, 2009. • May 15, 2009- Announced that Rick Carucci, Chief Financial Officer, was recognized by Institutional Investor’s 2009 America’s Best CFOs survey and ranked #1 in the economic times restaurant industry for defining and executing the Company’s strategies while delivering results during these challenging times • May 2, 2009- Oprah Winfrey endorsed a Kentucky Grilled Chicken (KGC) giveaway by announcing that every one receives a free two piece meal by printing out coupons available on her website. April 30, 2009- Announced that it is offering to pay the total consideration to all holders who validly tender and do not validly withdraw their Notes at or prior to the expiration of the tender offer. The tender offer is being made pursuant to an Offer to Purchase, dated as of April 30, 2009. • April 22, 2009- Issued a press release announcing financial results for the quarter ended March 21, 2009. They reaffirmed fiscal 2009 guidance for earnings per share (EPS) of $2. 10, or 10% growth, excluding special items. • April 20, 2009- El Pollo Loco challenges KFC to a Taste the Fire taste test to prove that their chicken taste better.
El Pollo Loco also set up a toll-free hotline to make it easy for KFC officials to accept its challenge for a taste test. • April 14, 2009- Announced a second secret recipe has been added to their menus: Kentucky Grilled Chicken (KGC) at New York City’s famed Friars Club. • March 24, 2009- Issued a press release announcing that it has agreed to purchase a 20% interest in the Little Sheep Group Limited-375 Restaurant Chain with Locations primarily in China. The purchase price for the transaction is approximately $63 million.
The transaction is subject to regulatory and other approvals and is expected to be completed by this summer. • March 06, 2009 –Named one of the “100 Best Corporate Citizens” by Corporate Responsibility Officer magazine, for its ongoing commitment to corporate responsibility. • February 23, 2009- Filed annual report which provides a comprehensive overview of the company for the past year with the U. S. Securities and Exchange Commission for period ending December 27, 2008. • December 4, 2008- Announced that for fiscal 2009 it expects at least 10% EPS growth, excluding special items.
The Company also reaffirmed its fiscal 2008 EPS growth forecast of 12%, excluding special items. According to Reuters Estimates, analysts are expecting the Company to report EPS of $2. 08 for fiscal 2009. • July 11, 2008- Executed a three-year syndicated Term Loan totaling $375 million. J. P. Morgan Securities Inc. arranged the Term Loan. JPMorgan Chase Bank, N. A. will serve as Administrative Agent for the Term Loan, which was syndicated among 15 participants. In addition to key developments and major events announced or filed with the SEC, there has also been some recent notable trading of the YUM stock by insiders.
These transactions were reported to the SEC using Form 4 and are also listed in the chart below: |Recent Insider Trading Activity: YUM! BRANDS INC | |Date |Name |Transaction |Num Shares |Price(s)|Value | |06/02/09 |ALLAN GRAHAM D |Sold |20,000 |$36. 51 |730,200. 00 | |06/02/09 |ALLAN GRAHAM D |Exercise |20,000 |$7. 57 |151,406. 00 | |06/01/09 |CREED GREG |Sold |3,295 |$35. 71 |117,664. 5 | |06/01/09 |CREED GREG |Exercise |3,295 |$12. 16 |40,075. 44 | |06/01/09 |BLUM JONATHAN DAVID |Sold |8,630 |$35. 73 |308,349. 91 | |06/01/09 |BLUM JONATHAN DAVID |Exercise |8,630 |$12. 20 |105,318. 80 | |05/11/09 |BROLICK EMIL J |Sold |5,678 |$33. 72 |191,490. 55 | |05/07/09 |ALLAN GRAHAM D |Sold |3,500 |$35. 50 |124,250. 00 | |05/07/09 |ALLAN GRAHAM D |Exercise |3,500 |$7. 57 |26,496. 5 | |05/06/09 |CREED GREG |Exercise |3,295 |$12. 16 |40,075. 44 | |05/06/09 |CREED GREG |Sold |3,295 |$35. 00 |115,325. 00 | |05/04/09 |CARUCCI RICHARD T |Sold |95,308 |$34. 04 |3. 24 Mil | |05/04/09 |CARUCCI RICHARD T |Exercise |95,308 |$7. 57 |721,510. 13 | |05/01/09 |BLUM JONATHAN DAVID |Sold |8,630 |$33. 08 |285,502. 84 | |05/01/09 |BLUM JONATHAN DAVID |Exercise |8,630 |$12. 20 |105,318. 80 | |04/30/09 |NOVAK DAVID C |Exercise |1. 7 Mil |$8. 50 |10. 76 Mil | |04/30/09 |NOVAK DAVID C |Sold |1. 27 Mil |$34. 06 |43. 10 Mil | From the chart, we can see that the top executives of Yum decided to exercise their stock options, which means they traded in the company offered benefit of the right to own stock for the actual stock (Investopedia, 2009). Once they obtained the stock (which was purchased at a lower fixed price), capital is raised from their sell via local stock exchanges as a means to finance the rapid growth abroad (Sterman, 2007). I think this is a smart move on the part of Yum.
Not only does it raise the money needed to front future/pending expansion ventures, it also doubles as brand acceptance now that the brand can be considered “local”, since through the stock exchange the other countries hold a stake in the company’s success. So far for this year, Yum brands continuously out performed the market with a 1. 10 stock beta. Below are a one year daily chart of their stock performance and their quarterly returns as reported by MSN money as well as a comparison to the Standard & Poor’s 500 (S & P 500) index and the market’s returns for the last five years as reported by Morningstar: [pic] Revenue – Quarterly Results (in Millions) | | |FY (12/09) |FY (12/08) |FY (12/07) | |1st Qtr |2,217. 0 |2,413. 0 |2,223. 0 | |2nd Qtr |NA |NA |2,367. 0 | |3rd Qtr |NA |NA |NA | |4th Qtr |NA |3,383. 0 |3,262. 0 | |Total |2,217. 0 |5,796. 0 |7,852. 0 | [pic] [pic] Total Returns % | |2006 | |2007 | |2008 | |YTD | | | |YUM | |25. | |30. 0 | |-18. 4 | |16. 5 | | | |+/- Industry | |6. 8 | |25. | |-4. 1 | |20. 3 | | | |+/- S 500 | |12. 3 | |26. 5 | |20. 0 | |-3. | | | | | As illustrated by the graph and table above, Yum Brands has out performed both the industry and the market (based on the S & P 500) in several years; proving their profitability and growth earning potentials. The company’s performance can also be supported by the key financial ratios from the last 3 years, which are listed below: |2006 |2007 |2008 |2009 TD | |Current Ratio |0. 52 |0. 72 |0. 55 |0. 71 | |Return on Assets |13. 7% |13. 4% |14. 0% |13. 9% | |Return On Equity |56. 8% |70. 2% |187. 0% |339. 1% | |Profit Margin |9. 9% |10% |9. 8% |8. 5% | |Earning Per Share |1. 51 |1. 74 |2. 03 |1. 91 | |PE Ratio |20. 1 |22. 8 |16. 1 |18. 2 | |Book Value/Share |2. 71 |2. 24 |-0. 23 |0. 6 | |Price/Book Value |10. 9 |17. 1 |NA |96. 07 | |Debt/Equity Ratio |1. 42 |2. 57 |NA |21. 08 | |Dividend Yield |0. 43 |0. 45 |0. 72 |0. 76 | Based on the current stock performance and future earnings potential, YUM was recently upgraded from a hold stock to a moderate buy.
Yum Brands is considered to be a “bullish” stock because many analysts are expecting good stock market figures and/or rising stock market prices. This could be attributed to the fact that in 2008, Yum! Brands, Inc. experienced a 14% EPS growth with its continued development in China and other international sectors. That marked their 7th straight year of at least 13% growth (which exceeded their 10% annual EPS target). Yum! Brands, Inc. is a great company to invest in. It has proven itself through a strong global portfolio as well as continuous growth globally. Yum has cornered the market in China as well as other underdeveloped nations.
This could pose some potential problems for the company as a lot is riding on the success of the new developments abroad. But so far the history has shown that the move is a strong one and nothing goes without risk. With the slight decline in the U. S. market as an effect of the current economic crises, the Yum executives have also committed to improving the U. S. brand by offering better customer service, differentiated products all at a lower cost. This is in response to the fluctuation in the market, but Yum hopes to create a competitive advantage with the strategy.
So, what does the future hold for Yum! Brands, Inc.? The recent publicity debacle and backlash over running out of the newly released Kentucky Grilled Chicken for an Oprah sponsored promotion, shortly there after followed by a lot of insider trading has sent red flags to suggest there is undisclosed trouble with the company. Though there are some skeptics that sway toward Yum being a bear stock; Analyst with Yahoo finance say that Yum is a stock to watch in the upcoming years with much of the commentary on the stock still leaning toward a bull pitch.
The analyst estimates of the stock look very promising and are highlighted in the chart listed below: |Current Year Earnings Est. (Dec-09) |2. 12 | |Next Year Earnings Est. (Dec-10) |2. 35 | |Current Year Revenue Est. (Dec-09) |11. 06 Billion | |Next Year Revenue Est. (Dec-10) |11. 24 Billion | |Earning Growth (Past 5 years) |13. 76% | |Future Earning Growth (Next 5 years) |11. 5% | After researching the company, it’s previous market performance and commentary made by analyst, my recommendation of the Yum! Brands, Inc. is to buy. I stand behind this recommendation so much that I even purchased 15 shares of the stock myself. You can not go wrong with pizza, chicken, burgers and tacos; and Yum has it all. Reference List Hoovers (2009). http://www. hoovers. com/yum! / Investopedia (2009). http://www. investopedia. com/ Morningstar Website (2009). http://www. morningstar. com/ MSN Money (2009). http://moneycentral. sn. com/detail/stock_quote Sterman, S. (2007 April, 1). Yum Brands Inc. – Globalization Drives Growth. Retrieved June 12, 2009 from QSR Magazine: http://www. qsrmagazine. com/. United States Securities and Exchange Commission. (2009, Feburary). Form 10-K Yum Brands Inc. Retrieved June 11, 2009, from http://investors. yum. com/. Yahoo Finance (2009). http://finance. yahoo. com/q? s=YUM Yum! Brands Website (2009). http://www. yum. com/investors/ Appendix Yum! Brands Top Executive Bios David C. Novak Chairman, Chief Executive Officer and President Yum!
Brands, Inc. [pic] David C. Novak became Chairman of the Board on January 1, 2001, and Chief Executive Officer of Yum! on January 1, 2000. He also serves as President of Yum! , a position he has held since October 21, 1997. He previously served as Group President and Chief Executive Officer, KFC and Pizza Hut from August 1996 to July 1997, at which time he became acting Vice Chairman of Yum!. He also held senior management positions at Pepsi-Cola Company, including Chief Operating Officer, and Executive Vice President of Marketing and Sales. Richard T. Carucci
Chief Financial Officer Yum! Brands, Inc. [pic] Rick came to Yum! Brands in October of 2004 from Yum! Restaurants International. He is responsible for the Company’s overall accounting, control, internal auditing, investor relations, risk management, strategic planning, treasury, tax, and information technology functions. Carucci graduated magna cum laude in 1979 with his Bachelor’s Degree in Applied Mathematics-Economics from Brown University. He received his MBA from the University of California’s Berkley Haas School of Business in 1984. Emil J. Brolick
Chief Operating and Development Officer Yum! Brands, Inc. [pic] He has served as Chief Operating Officer since June 2008. Prior to this position, he served as President of U. S. Brand Building, a position he held from December 2006 to June 2008. Prior to that, he served as President and Chief Concept Officer of Taco Bell, a position he held from July 2000 to November 2006. Prior to joining Taco Bell, Mr. Brolick served as Senior Vice President of New Product Marketing, Research & Strategic Planning for Wendy’s International, Inc. from August 1995 to July 2000. Roger Eaton
President and Chief Concept Officer KFC [pic] Roger Eaton became President of KFC Corporation in early 2008. Eaton is an international restaurant industry veteran and has been with Yum! Brands for 12 years. Prior to taking on the top job at KFC, Roger was Chief Operating and Development Officer for Yum! Since 2000, he has served as Senior Vice President/Managing Director of Yum! Restaurants International South Pacific (SOPAC). Earlier in his career, Eaton was Regional Operations Director of KFC SOPAC, General Manager of KFC New Zealand and Finance Director of KFC SOPAC.
Under his leadership, SOPAC has had 27 consecutive quarters of profitable same store sales growth, as well as a consistent above target new restaurant builds. Scott O. Bergren President and Chief Concept Officer Pizza Hut [pic] Scott Bergren was appointed President and Chief Concept Officer for Pizza Hut, Inc. in December of 2006. Previously he was the Executive VP Marketing for KFC and Yum! Brands in Louisville, Ky. He joined Yum! Brands after a year and a half as Chief Concept Officer of Yum! Restaurants International (YRI) in Dallas.
Earlier in his career, Scott built and operated Pizza Hut and Kentucky Fried Chicken restaurants in Mexico and Central America working for Tricon’s International Division. Greg Creed President and Chief Concept Officer Taco Bell [pic] As head of Taco Bell, Greg brings a proven track record of more than 25 years experience in marketing and operations with leading packaged good and restaurant brands. Prior to moving to Taco Bell, he served as Chief Operating Officer for Yum! and initiated and launched a one-system people approach across all global operations by working with COOs and their teams.
Greg was Chief Marketing Officer at Taco Bell during its highest sales and transaction growth period in recent history, where he spearheaded the “Think Outside the Bun” marketing efforts and new product introductions that generated consistent same store sales and profit growth during the last five years. Ben Butler President Long John Silver’s & A [pic] Long John Silver’s & A&W Restaurants, President Ben Butler was appointed President of Long John Silver’s and A Restaurants in May 2007. Prior to that, he was General Manager of Yum!
Restaurants Caribbean and Latin America. Ben first entered the restaurant business in 1992, and since that time he has worked in a number of International postings, including Toronto, Hong Kong, and Singapore. He holds an Honors Degree in Business Administration from the University of Western Ontario, Canada and he is a citizen of both Canada and the United States. Graham D. Allan President Yum! Restaurants International (YRI) [pic] Graham Allan was named President of YRI in November 2003. Prior to that, he had served as Managing Director of YRI in Europe.
Allan held various roles in the company’s European organization including Managing Director of KFC in the United Kingdom from 1996 until 2000. Allan’s prior business experience includes positions with a leading international brewing company based in Melbourne, Australia, and as a consultant with McKinsey & Company, Inc. During his time with McKinsey, Allan managed numerous international assignments in Australia, Madrid and in New York. Samuel Su Vice Chairman of the Board, Yum! Brands, Inc. President, Yum! Brands China Division pic] Sam Su became Vice Chairman of the Board on March 14, 2008, maintaining his position as President of Yum! Brands China Division. The China Division operates in 500 cities in Mainland China, with over 2,500 KFC quick service restaurants, more than 400 Pizza Hut casual dining restaurants, and 79 Pizza Hut Home Service units. It also has created and is testing East Dawning™, a quick service restaurant concept serving Chinese food. The China Division also includes KFC in Taiwan and KFC and Pizza Hut in Thailand. Mr. Su was named President of Greater China for Tricon Global Restaurants International in 1997.