Kentucky Fried Chicken 2006 Annual Report Download - page 29

34 YUM! BRANDS, INC.
Significant Known Events, Trends or Uncertainties
Impacting or Expected to Impact Comparisons of
Reported or Future Results
The following factors impacted comparability of operating
performance for the years ended December 30, 2006, Decem-
ber 31, 2005 and December 25, 2004 and could impact
comparability with our results in 2007.
EXTRA WEEK IN 2005 Our fiscal calendar results in a 53rd
week every five or six years. Fiscal year 2005 included a 53rd
week in the fourth quarter for the majority of our U.S. busi-
nesses as well as our international businesses that report
on a period, as opposed to a monthly, basis. In the U.S., we
permanently accelerated the timing of the KFC business clos-
ing by one week in December 2005, and thus, there was no
53rd week benefit for this business. Additionally, all China
Division businesses report on a monthly basis and thus did
not have a 53rd week.
The following table summarizes the estimated increase
(decrease) of the 53rd week on fiscal year 2005 revenues
and operating profit:
Inter-
national Unallo-
U.S. Division cated Total
Revenues
Company sales $ 58 $ 27 $ — $ 85
Franchise and license fees 8 3 — 11
Total Revenues $ 66 $ 30 $ — $ 96
Operating profit
Franchise and license fees $ 8 $ 3 $ — $ 11
Restaurant profit 14 5 — 19
General and administrative
expenses (2) (3) (3) (8)
Equity income from
investments in
unconsolidated affiliates — 1 — 1
Operating profit $ 20 $ 6 $ (3) $ 23
MAINLAND CHINA RECOVERY Our KFC business in mainland
China was negatively impacted by the interruption of product
offerings and negative publicity associated with a supplier
ingredient issue experienced in late March 2005 as well as
consumer concerns related to Avian Flu in the fourth quar-
ter of 2005. As a result of the aforementioned issues, the
China Division experienced system sales growth in 2005 of
11% excluding currency translation which is below our ongo-
ing target of at least 22%. During the year ended December
30, 2006, the China Division recovered from these issues
and achieved growth rates of 23% for both system sales and
Company sales, both excluding currency translation. During
2005, we entered into agreements with the supplier of the
aforementioned ingredient. As a result, we recognized recover-
ies of approximately $24 million in Other income (expense)
in our Consolidated Statement of Income for the year ended
December 31, 2005.
UNITED STATES RESTAURANT PROFIT Restaurant profits in
the U.S. were positively impacted by a decline of approxi-
mately $45 million in commodity costs (principally meats
and cheese) for the year ended 2006 versus the year ended
2005. We expect commodity inflation in the U.S. of 2% to
3% in 2007.
Our U.S. restaurant profits were also positively impacted
by lower self-insured property and casualty insurance expenses
of $31 million for the year ended 2006 versus 2005. These
lower insurance expenses were the result of improved loss
trends, which we believe are driven by safety and other mea-
sures we have implemented over time, on our insurance
reserves and lower property related losses (including the lap-
ping of the unfavorable impact of Hurricane Katrina in 2005
and a small, related insurance recovery in 2006). While we
anticipate that these favorable loss trends will continue, it
is difficult to forecast their impact, including the impact of
large property and casualty losses that may occur. However,
we anticipate that given the significant favorability in 2006,
property and casualty insurance expense in 2007 will be flat
to slightly higher in comparison.
TACO BELL NORTHEAST UNITED STATES PRODUCE-SOURCING
ISSUE Our Taco Bell business was negatively impacted by
adverse publicity related to a produce-sourcing issue dur-
ing November and December 2006. As a result, Taco Bell
experienced significant sales declines at both company and
franchise stores, particularly in the northeast United States
where an outbreak of illness associated with a particular
strain of E. coli 0157:H7 took place. According to the Centers
for Disease Control this outbreak was associated with eating
at Taco Bell restaurants in Pennsylvania, New Jersey, New
York and Delaware. In the fourth quarter of 2006, Taco Bell’s
company same store sales were down 5%, driven largely by
a very significant negative sales impact during the month of
December. Overall, we estimate this issue negatively impacted
operating profit by $20 million in the fourth quarter of 2006
due primarily to lost Company sales and franchise and license
fees as well as incremental marketing costs. Same store
sales at Taco Bell have begun to recover from their lowest
point in the third week of December. While we anticipate that
Taco Bell will fully recover from this issue by the middle of
2007, our experience has been that recoveries of this type
vary in duration and could take longer. The timing of such
recovery will determine the impact on 2007 operating profit.
We currently forecast same store sales growth at Taco Bell in
2007 of one to two percent.
U.S. BEVERAGE AGREEMENT CONTRACT TERMINATION During
the first quarter of 2006, we entered into an agreement with
a beverage supplier to certain of our Concepts to terminate
a long-term supply contract. As a result of the cash payment
we made to the supplier in connection with this termination,
we recorded a pre-tax charge of $8 million to Other (income)
expense in the quarter ended March 25, 2006. The affected
Concepts have entered into an agreement with an alterna-
tive beverage supplier. The contract termination charge we
recorded in the quarter ended March 25, 2006 was partly
offset by more favorable beverage pricing for our Concepts in
2006. We expect to continue to benefit from the more favor-
able pricing in 2007 and beyond.