Pizza Hut 2012 Annual Report Download - page 108

YUM! BRANDS, INC.-2012 Form10-K 16
Form 10-K
PART II
ITEM7Management’s Discussion and Analysis ofFinancial Condition and Results ofOperations
YUM’s business consists of four reporting segments: YUM China (“China”
or “China Division”), YUM Restaurants International (“YRI” or “International
Division”), United States (“U.S.”) and YUM Restaurants India (“India” or
“India Division”).The China Division includes mainland China and the
India Division includes India, Bangladesh, Mauritius, Nepal and Sri Lanka.
YRI includes the remainder of our international operations.The China
Division, YRI and Taco Bell U.S. now represent approximately 85% of
the Company’s operating profi ts, excluding Corporate and unallocated
income and expenses.
In 2012, our India Division began being reported as a standalone reporting
segment separate from YRI as a result of changes to our management
reporting structure. While our consolidated results are not impacted, our
historical segment information has been restated to be consistent with
the current period presentation.
Strategies
The Company continues to focus on four key strategies:
Build Leading Brands in China in Every Signifi cant Category – The
Company has developed the KFC and Pizza Hut brands into the leading
quick service and casual dining restaurant brands, respectively, in mainland
China.Additionally, the Company owns and operates the distribution
system for its restaurants in China which we believe provides a signifi cant
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 testing
the additional 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 Ltd.
(“Little Sheep”), a leading casual dining concept in China. This acquisition
brought our total ownership to approximately 93% of the business. Our
ongoing earnings growth model in China includes double-digit percentage
unit growth, mid-teen system sales growth, mid-single digit same-store sales
growth and moderate leverage of our General and Administrative (“G&A”)
infrastructure, which we expect to drive Operating Profi t growth of 15%.
Drive Aggressive International Expansion and Build Strong Brands
Everywhere – Outside the U.S. and China the Company and its franchisees
opened over 1,000 new restaurants in 2012, representing 13 straight years
of opening over 700 restaurants, and the Company is one of the leading
international retail developers in terms of units opened.The Company
expects to continue to experience strong growth by building out existing
markets and growing in new markets including India, France, Germany,
Russia and across Africa.The International Division’s Operating Profi t
has experienced a 10-year compound annual growth rate of 12%.Our
ongoing earnings growth model for YRI includes Operating Profi t growth
of 10% driven by 3-4% unit growth, system sales growth of 6%, at least
2-3% same-store sales growth, margin improvement and leverage of our
G&A infrastructure.
Dramatically Improve U.S. Brand Positions, Consistency and
Returns – The Company continues to focus on improving its U.S. position
through differentiated products and marketing and an improved customer
experience.The Company also strives to provide industry-leading new
product innovation which adds sales layers and expands day parts.We
continue to evaluate our returns and ownership positions with an earn-
the-right-to-own philosophy on Company-owned restaurants.Our ongoing
earnings growth model for the U.S. calls for Operating Profi t growth of 5%
driven by same-store sales growth of at least 2%, margin improvement
and leverage of our G&A infrastructure.
Drive Industry-Leading, Long-Term Shareholder and Franchisee Value –
The Company is focused on delivering high returns and returning substantial
cash fl ows to its shareholders via dividends and share repurchases.The
Company has one of the highest returns on invested capital in the Quick
Service Restaurants (“QSR”) industry.The Company’s dividend and share
repurchase programs have returned over $2.6billion and $7.6billion to
shareholders, respectively, since 2004.The Company targets an annual
dividend payout ratio of 35% to 40% of net income and has increased
the quarterly dividend at a double-digit percentage rate each year since
fi rst initiating a dividend in 2004.Shares are repurchased opportunistically
as part of our regular capital structure decisions.
The ongoing earnings growth rates referenced above represent our average
annual targets for the next several years.Consistent with these ongoing
earnings growth rates, in December2012 we indicated our expectation
of at least 10% EPS growth for 2013. However, KFC China same-store
sales turned sharply negative during the last two weeks in December as a
result of adverse publicity from a poultry supply situation. We have made
the assumptions that it will take time to restore consumer confi dence and
KFC China same-store sales will improve as the year progresses and will
be positive in the fourth quarter. With these assumptions, for the full year,
we estimate that China Restaurant margin will be in the mid-teens, China
Operating Profi t will be negative versus prior year and EPS, excluding
Special Items, will decline by a mid-single digit percentage in 2013. This
includes an expectation for a signifi cant decline in EPS performance in
the fi rst half of the year followed by EPS growth in the second half. We
expect to open at least 700 new units in China, which is unchanged from
our previous guidance. See the China Results of Operations paragraph
within the Signifi cant Known Events, Trends or Uncertainties Impacting or
Expected to Impact Comparisons of Reported or Future Results section
of this MD&A for further discussion of the poultry supply situation’s impact
to the China Division’s results of operations.
2012 Highlights
•
Worldwide system sales grew 5%, prior to foreign currency translation.
– Worldwide system sales growth was 8%, excluding the 2011 divestiture
of LJS and A&W, the 53
rd
-week impact and the acquisition of Little
Sheep, including 17% in China, 7% at YRI and 5% in the U.S.
•Same-store sales grew 4% in China, 3% at YRI and 5% in the U.S.
• Worldwide restaurant margin increased 0.6 percentage points to 16.6%.
• Worldwide operating profi t grew 12%, prior to foreign currency translation.
• Record International development with 1,976 new restaurants opened,
including 889 new units in China, 949 new units at YRI and 138 in the
India Division; 83% of this development occurred in emerging markets.
All preceding comparisons are versus the same period a year ago and
exclude the impact of Special Items.See the Signifi cant Known Events,
Trends or Uncertainties Impacting or Expected to Impact Comparisons
of Reported or Future Results section of this MD&A for a description of
Special Items.