Popeye's 2013 Annual Report Download - page 50

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to attract and retain additional qualified management personnel, limitations on our business under our credit facility,
our ability to comply with the repayment requirements, covenants, tests and restrictions contained in our credit facility,
failure of our franchisees, a decline in the number of franchised units, adecline in our ability to franchise new units,
slowed expansion into new markets, unexpected and adverse fluctuations in quarterly results, increased government
regulation, effects of volatile gasoline prices, supply and delivery shortages or interruptions, currency, economic and
political factors that affect our international operations, inadequate protection of our intellectual property and liabilities
for environmental contamination and the other risk factors detailed in this Annual Report on Form 10-K and other
documents we file with the Securities and Exchange Commission. Therefore, you should not place undue reliance on
any forward-looking statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in certain commodity prices, foreign currency exchange rates and
interest rates. All of these market risks arise in the normal course of business, as we do not engage in speculative trading
activities. The following analysis provides quantitative information regarding these risks.
Commodity Market Risk. We are exposed to market risk from changes in poultry and other commodity prices.
Fresh chicken is the principal raw material for our Popeyes operations, constituting more than 40% of our combined
“Restaurant food, beverages and packaging” costs. These costs are significantly affected by fluctuations in the cost of
chicken, which can result from anumber of factors, including increases in the cost of grain, disease, declining market
supply of fast-food sized chickens and other factors that affect availability, and greater international demand for domestic
chicken products. We are affected by fluctuations in the cost of other commodities including shortening, wheat, gas
and utility price fluctuations. Our ability to recover increased costs through higher pricing is limited by the competitive
environment in which we operate.
In order to ensure favorable pricing for fresh chicken purchases and to maintain an adequate supply of fresh chicken
for the Popeyes system, Supply Management Services, Inc. (a not-for-profit purchasing cooperative of which we are
amember) has entered into chicken purchasing contracts with chicken suppliers. The contracts, which pertain to the
vast majority of our system-wide purchases for Popeyes are “cost-plus” contracts that utilize prices based upon the cost
of feed grains plus certain agreed upon non-feed and processing costs. In order to stabilize pricing for the Popeyes
system, Supply Management Services, Inc. has entered into commodity pricing agreements for certain commodities
including corn, soy, and wheat which impact the price of poultry and other food costs. Current commodity coverage
is approximately100% of Q1 needs at levels equal to or slightly lower than in Q4 2013.
Foreign Currency Exchange Rate Risk. We are exposed to foreign currency exchange risk from the potential
changes in foreign currency rates that directly impact our royalty revenues and cash flows from our international
franchise operations. In 2013, franchise revenues from these foreign currency based operations represented
approximately 7.8% of our total franchise revenues. For each of 2013, 2012 and, foreign-sourced revenues represented
approximately 6.4%, 6.9% and 7.5%, of our total revenues, respectively. All other things being equal, for the fiscal
year ended December 29, 2013, operating profit would have decreased by approximately $0.8 million if all foreign
currencies had uniformly weakened 10% relative to the U.S. Dollar.
As of December 29, 2013, approximately $1.3 million of our accounts receivable were denominated in foreign
currencies. During 2013 the net loss from the exchange rate was insignificant. Our international franchised operations
are in 28 foreign countries with approximately 50% or our revenues from international royalties originating from
restaurants in Korea, Canada and Turkey.
Interest Rate Risk. Our net exposure to interest rate risk consists of our borrowings under our 2013 Credit Facility,
as amended and restated. Borrowings made pursuant to that facility include interest rates that are benchmarked to
U.S. and European short-term floating interest rates. As of December 29, 2013, the balances outstanding under our
2013 Credit Facility,totaled $63.0 million. The impact on our annual results of operations of ahypothetical one-point
interest rate change on the outstanding balances under our 2013 Credit Facility would be approximately $0.6 million.