Pizza Hut 2004 Annual Report Download - page 35

Management’s฀Discussion฀and฀Analysis฀฀
of฀Financial฀Condition฀and฀Results฀of฀Operations
INTRODUCTION฀AND฀OVERVIEW
YUM!฀ Brands,฀ Inc.฀ and฀ Subsidiaries฀ (collectively฀ referred฀
to฀as฀ “YUM”฀ or฀the฀“Company”)฀ comprises฀ the฀ worldwide฀
operations฀of฀KFC,฀Pizza฀Hut,฀Taco฀Bell,฀Long฀John฀Silver’s฀
(“LJS”)฀ and฀ A&W฀ All-American฀ Food฀ Restaurants฀ (“A&W”)฀
(collectively฀“the฀Concepts”)฀and฀is฀the฀world’s฀largest฀quick฀
service฀restaurant฀(“QSR”)฀company฀based฀on฀the฀number฀of฀
system฀units.฀LJS฀and฀A&W฀were฀added฀when฀YUM฀acquired฀
Yorkshire฀Global฀Restaurants,฀Inc.฀(“YGR”)฀on฀May฀7,฀2002.฀
With฀12,998฀international฀units,฀YUM฀is฀the฀second฀largest฀
QSR฀company฀outside฀the฀U.S.฀YUM฀became฀an฀independent,฀
publicly-owned฀company฀on฀October฀6,฀1997฀(the฀“Spin-off฀
Date”)฀via฀a฀tax-free฀distribution฀of฀our฀Common฀Stock฀(the฀
“Distribution”฀or฀“Spin-off”)฀to฀the฀shareholders฀of฀our฀former฀
parent,฀PepsiCo,฀Inc.฀(“PepsiCo”).
Through฀its฀Concepts,฀YUM฀develops,฀operates,฀franchises฀
and฀licenses฀a฀system฀of฀both฀traditional฀and฀non-traditional฀
QSR฀restaurants.฀Traditional฀units฀feature฀dine-in,฀carryout฀
and,฀in฀some฀instances,฀drive-thru฀or฀delivery฀services.฀Non-
traditional฀units,฀which฀are฀typically฀licensed฀outlets,฀include฀
express฀units฀and฀kiosks฀which฀have฀a฀more฀limited฀menu฀
and฀operate฀in฀non-traditional฀locations฀like฀malls,฀airports,฀
gasoline฀ service฀ stations,฀ convenience฀ stores,฀ stadiums,฀
amusement฀parks฀and฀colleges,฀where฀a฀full-scale฀traditional฀
outlet฀would฀not฀be฀practical฀or฀efficient.
The฀retail฀food฀industry,฀in฀which฀the฀Company฀competes,฀
is฀made฀up฀of฀supermarkets,฀supercenters,฀warehouse฀stores,฀
convenience฀stores,฀coffee฀shops,฀snack฀bars,฀delicatessens฀
and฀restaurants฀(including฀the฀QSR฀segment),฀and฀is฀intensely฀
competitive฀with฀respect฀to฀food฀quality,฀price,฀service,฀conve-
nience,฀location฀and฀concept.฀The฀industry฀is฀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;฀ and฀ disposable฀
purchasing฀power.฀Each฀of฀the฀Concepts฀competes฀with฀inter-
national,฀national฀and฀regional฀restaurant฀chains฀as฀well฀as฀
locally-owned฀restaurants,฀not฀only฀for฀customers,฀but฀also฀for฀
management฀and฀hourly฀personnel,฀suitable฀real฀estate฀sites฀
and฀qualified฀franchisees.
The฀Company’s฀key฀strategies฀are:
฀ Building฀dominant฀restaurant฀brands฀in฀China
฀ Driving฀profitable฀international฀expansion
฀ Improving฀restaurant฀operations
฀ Multibranding฀category-leading฀brands
The฀ Company฀ is฀ focused฀ on฀ five฀ long-term฀ measures฀
identified฀as฀essential฀ to฀ our฀growth฀and฀ progress.฀These฀
five฀measures฀and฀related฀key฀performance฀indicators฀are฀as฀
follows:
฀ International฀expansion
•฀International฀system-sales฀growth฀(local฀currency)
•฀Number฀of฀new฀international฀restaurant฀openings
•฀Net฀international฀unit฀growth
฀ Multibrand฀innovation฀and฀expansion
•฀Number฀of฀multibrand฀restaurant฀locations
•฀Number฀of฀multibrand฀units฀added
•฀Number฀of฀franchise฀multibrand฀units฀added
฀ Portfolio฀of฀category-leading฀U.S.฀brands
•฀U.S.฀blended฀same฀store฀sales฀growth
•฀U.S.฀system฀sales฀growth
฀ Global฀franchise฀fees
•฀New฀restaurant฀openings฀by฀franchisees
•฀Franchise฀fee฀growth
฀ Strong฀cash฀generation฀and฀returns
•฀Cash฀generated฀from฀all฀sources
•฀฀Cash฀generated฀from฀all฀sources฀after฀capital฀
spending
•฀Restaurant฀margins
Our฀ progress฀ against฀ these฀ measures฀ is฀ discussed฀
throughout฀ the฀ Management’s฀ Discussion฀ and฀ Analysis฀
(“MD&A”).
Throughout฀ the฀ MD&A,฀ the฀ Company฀ provides฀ the฀
percentage฀change฀excluding฀the฀impact฀of฀foreign฀currency฀
translation.฀These฀amounts฀are฀derived฀by฀translating฀current฀
year฀results฀at฀prior฀year฀average฀exchange฀rates.฀We฀believe฀
the฀ elimination฀ of฀ the฀ foreign฀ currency฀ translation฀ impact฀
provides฀better฀year-to-year฀comparability฀without฀the฀distor-
tion฀of฀foreign฀currency฀fluctuations.
This฀ MD&A฀ should฀ be฀ read฀ in฀ conjunction฀ with฀ our฀
Consolidated฀Financial฀Statements฀on฀pages฀47฀through฀50฀
and฀the฀Cautionary฀Statements฀on฀page฀46.฀All฀Note฀refer-
ences฀herein฀refer฀to฀the฀Notes฀to฀the฀Consolidated฀Financial฀
Statements฀on฀pages฀51฀through฀73.฀Tabular฀amounts฀are฀
displayed฀in฀millions฀except฀per฀share฀and฀unit฀count฀amounts,฀
or฀as฀otherwise฀specifically฀identified.
FACTORS฀AFFECTING฀COMPARABILITY฀OF฀2004฀RESULTS฀
TO฀2003฀RESULTS฀AND฀2003฀RESULTS฀TO฀2002฀RESULTS
Lease฀ Accounting฀ Adjustments฀ In฀ late฀ 2004฀ and฀ early฀
2005,฀ a฀ number฀ of฀ companies฀ within฀ the฀ QSR฀ industry฀
announced฀adjustments฀to฀their฀accounting฀for฀leases฀and฀
the฀depreciation฀of฀leasehold฀improvements.฀In฀consultation฀
with฀our฀external฀auditors,฀we฀also฀determined฀that฀an฀adjust-
ment฀was฀necessary฀to฀modify฀our฀accounting฀in฀these฀areas.฀
Accordingly,฀in฀the฀fourth฀quarter฀of฀ 2004,฀we฀ recorded฀an฀
adjustment฀such฀that฀all฀of฀our฀leasehold฀improvements฀are฀
now฀being฀depreciated฀over฀the฀shorter฀of฀their฀useful฀lives฀
or฀the฀term฀of฀the฀lease,฀including฀options฀in฀some฀instances,฀
over฀which฀we฀are฀recording฀rent฀expense,฀including฀escala-
tions,฀on฀a฀straight-line฀basis.
The฀cumulative฀adjustment,฀primarily฀through฀increased฀
U.S.฀depreciation฀expense,฀totaled฀$11.5฀million฀($7฀million฀
after฀ tax).฀ The฀portions฀ of฀ this฀ adjustment฀ that฀ related฀ to฀
2004฀full฀year฀and฀2004฀fourth฀quarter฀were฀approximately฀
$3฀million฀ and฀ $1฀million,฀ respectively.฀ As฀ the฀ portion฀ of฀
our฀adjustment฀recorded฀that฀was฀a฀correction฀of฀errors฀of฀
amounts฀reported฀in฀our฀prior฀period฀financial฀statements฀was฀
not฀material฀to฀any฀of฀those฀prior฀period฀financial฀statements,฀
the฀entire฀adjustment฀was฀recorded฀in฀the฀2004฀Consolidated฀
Financial฀Statements฀and฀no฀adjustment฀was฀made฀to฀any฀
prior฀ period฀ financial฀ statements.฀ We฀ anticipate฀ that฀ the฀
impact฀ of฀ this฀ accounting฀ change฀ will฀ result฀ in฀ additional฀
expense฀of฀$3฀million฀in฀2005.
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Yum!฀Brands,฀Inc.