Pizza Hut 2012 Annual Report Download - page 99

YUM! BRANDS, INC.-2012 Form10-K 7
Form 10-K
PART I
ITEM 1ARisk Factors
In addition, any signifi cant or prolonged deterioration in U.S.-China
relations could adversely affect our China business.Certain risks and
uncertainties of doing business in China are solely within the control of
the Chinese government, and Chinese law regulates the scope of our
foreign investments and business conducted within China.There are
also uncertainties regarding the interpretation and application of laws and
regulations and the enforceability of intellectual property and contract rights
in China.If we were unable to enforce our intellectual property or contract
rights in China, our business would be adversely impacted.
Our foreign operations subject us to risks
that could negatively affect our business.
A signifi cant portion of our Concepts’ restaurants are operated in countries
and territories outside of the U.S., and we intend to continue expansion
of our international operations.As a result, our business is increasingly
exposed to risks inherent in foreign operations.These risks, which can
vary substantially by country, include political instability, corruption, social
and ethnic unrest, changes in economic conditions (including consumer
spending, unemployment levels and wage and commodity infl ation), the
regulatory environment, income and non-income based tax rates and laws
and consumer preferences as well as changes in the laws and policies that
govern foreign investment in countries where our restaurants are operated.
In addition, our results of operations and the value of our foreign assets are
affected by fl uctuations in currency exchange rates, which may adversely
affect reported earnings.More specifi cally, an increase in the value of the
U.S. Dollar relative to other currencies, such as the Australian Dollar, the
British Pound, the Canadian Dollar and the Euro, could have an adverse
effect on our reported earnings.There can be no assurance as to the
future effect of any such changes on our results of operations, fi nancial
condition or cash fl ows.
We may not attain our target development goals,
and aggressive development could cannibalize
existing sales.
Our growth strategy depends in large part on our ability to increase our net
restaurant count in markets outside the U.S., especially China and other
emerging markets.The successful development of new units will depend
in large part on our ability and the ability of our franchisees to open new
restaurants and to operate these restaurants on a profi table basis.We
cannot guarantee that we, or our franchisees, will be able to achieve our
expansion goals or that new restaurants will be operated profi tably.Further,
there is no assurance that any new restaurant will produce operating results
similar to those of our existing restaurants.Other risks which could impact
our ability to increase our net restaurant count include prevailing economic
conditions and our, or our franchisees’ ability to obtain suitable restaurant
locations, negotiate acceptable lease or purchase terms for the locations,
obtain required permits and approvals in a timely manner, hire and train
qualifi ed personnel and meet construction schedules.
Expansion into target markets could also be affected by our franchisees’
ability to obtain fi nancing to construct and open new restaurants.If it
becomes more diffi cult or expensive for our franchisees to obtain fi nancing
to develop new restaurants, our planned growth could slow and our future
revenue and operating cash fl ows could be adversely impacted.
In addition, the new restaurants could impact the sales of our existing
restaurants nearby.There can be no assurance that sales cannibalization
will not occur or become more signifi cant in the future as we increase our
presence in existing markets.
Changes in commodity and other operating
costs could adversely affect our results
of operations.
Any increase in certain commodity prices, such as food, supply and
energy costs, could adversely affect our operating results.Because
our Concepts and their franchisees provide competitively priced food,
our ability to pass along commodity price increases to our customers
is limited.Signifi cant increases in gasoline prices could also result in a
decrease of customer traffi c at our restaurants or the imposition of fuel
surcharges by our distributors, each of which could adversely affect our
profi t margins.Our operating expenses also include employee wages and
benefi ts and insurance costs (including workers’ compensation, general
liability, property and health) which may increase over time. Any such
increase could adversely affect our profi t margins.
Shortages or interruptions in the availability
and delivery of food and other supplies may
increase costs or reduce revenues.
The products sold by our Concepts and their franchisees are sourced
from a wide variety of domestic and international suppliers. We are also
dependent upon third parties to make frequent deliveries of food products
and supplies that meet our specifi cations at competitive prices.Shortages
or interruptions in the supply of food items and other supplies to our
restaurants could adversely affect the availability, quality and cost of items
we buy and the operations of our restaurants.Such shortages or disruptions
could be caused by inclement weather, natural disasters such as fl oods,
drought and hurricanes, increased demand, problems in production or
distribution, the inability of our vendors to obtain credit, political instability
in the countries in which foreign suppliers and distributors are located, the
fi nancial instability of suppliers and distributors, suppliers’ or distributors’
failure to meet our standards, product quality issues, infl ation, other factors
relating to the suppliers and distributors and the countries in which they
are located, food safety warnings or advisories or the prospect of such
pronouncements or other conditions beyond our control.A shortage or
interruption in the availability of certain food products or supplies could
increase costs and limit the availability of products critical to restaurant
operations.In addition, failure by a principal distributor for our Concepts
and/or our franchisees to meet its service requirements could lead to a
disruption of service or supply until a new distributor is engaged, and any
disruption could have an adverse effect on our business.
Our operating results are closely tied
to the success of our Concepts’ franchisees.
A signifi cant portion of our restaurants are operated by franchisees from
whom we derive a signifi cant portion of our revenue in the form of royalty
payments. As a result, the success of our business depends in part upon
the operational and fi nancial success of our franchisees.We have limited
control over how our franchisees’ businesses are run, and the inability of
our franchisees to operate successfully could adversely affect our operating
results through decreased royalty payments.
If our franchisees incur too much debt or if economic or sales trends
deteriorate such that they are unable to repay existing debt, it could result
in fi nancial distress, including insolvency or bankruptcy.If a signifi cant
franchisee or a signifi cant number of our franchisees become fi nancially
distressed, our operating results could be impacted through reduced or
delayed royalty payments or increased rent obligations for leased properties
on which we are contingently liable.