Beyond the Balance Sheet: Yum! Brands

This will be the first of an on going series where I will focus on one company (usually public) and report on the interesting parts of the annual report/10k.

If you are like me, you are looking forward to the 138th Kentucky Derby more than the celebration of the battle of Puebla. The only time of the year that the general public pays attention to the sport of kings, the Kentucky Derby will be broadcasted today on NBC. For those of us who live too far way from Churchill Downs or cannot find a hat large enough we are forced to watch the race on TV. This will be the one time a year the parent company of the fast food joints Taco Bell, KFC, and Pizza Hut advertise under its own name. I never understood why a company that brings in $10 billion dollars a year only advertise once a year.

So in honor of the Mexicans victory against the French, I want to look at a company whose specialty is selling Mexican, Italian, and "Kentuckian" food: YUM! Brands. It was spun off from Pepsi in 1997. They have over 35,000 restaurants worldwide. But this is all information you could find on the company's entry on Wikipedia. I wanted to go beyond that by looking at interesting segments of Yum!'s most recent annual report. 

Out with the Old, In with the Bah Ram New?

At the end of 2011, Yum sold of two of its brands: Long John Silvers and A&W restaurants. Truth be told, I did not know they ever owned the two fast-food chains. They theory was they could package these brands (or as they call "concepts") with the already successful restaurants. It worked well with their core brands. But after 10 years, the two restaurants only contributed to 1% of Gross Operating Profits.

Sort of looks like the Starbucks logo doesn't it?

Yum! Brands set its sights on what it considers the best place for growth: China. The first KFC opened in China in 1987, with Pizza Hut following in 1990. While KFC and Pizza Hut represent some of the most successful fast-food restaurants in China today, Taco Bell never found success there--opening in 2003 and closing in 2008. Starting in 2009, Yum! Started investing in a hot-pot restaurant chain: Little Sheep. In 2011, they announced their intent to gain a controlling interest in the company.

I have never heard of Hot Pot before.  My initial reaction was it was basically Chinese  fondue. Each table is giving a simmering pot of broth and plates full of raw ingredients, which are added to the customers liking. I doubt that Yum! Foods will export the idea back here to the States but I would like to try it.

Refranchising and Russia

When reading Yum!'s annual report, barely go a page goes by with out them using the term refranchising. It seems to be the new hip term in the franchise world that basically means turning the company owned units into franchises.  Google the term and you will find articles about every major franchisor trying to "refranchise". It is a great way to raise capital. While refranchised restaurants are sold at a loss, the company makes it up with lower operating costs and new sources of franchise and licensing fees.

Russian KFC, before the 2011 rebranding.

China isn't the only country Yum! is exploring. While Pizza Hut was in Russia since its inception, KFC had a hard time to getting going in Russia. After its first attempt didn’t work KFC entered into a partnership with a Russian company Rostik in 2005. In 2010, Yum! exercised its option to purchase the Rostik's interest in the partnership. While it is unsurprising, it is sad to announce they are rebranding to simply KFC.

Yum! Brands Quick Hits:

State of Incorporation	North Carolina	Look forward to an upcoming post about the best states to incorporate in.
Headquarters	Louisville, KY	Hence sponsoring the Derby
Chairman of the Board	David Novak	Also CEO and Pres.
Executive Compensation	$6 million	$1.45 base salary + $4.54 bonus award
Cost of Goods Sold (listed as Food and Paper)	$3.6 billion	That’s a lot of tacos, or we should seriously wonder the value of the paper they are wrapped in
Basic Earnings Per Share 2011	$2.81	Up from $2.44 in 2010 and $2.28 in 2009
Dividend 2011	$1.07	I think as a general rule, they should always keep something on their menus cheaper than the declared dividend

Editors Note:

If you noticed I didn't spend this article talking about the numbers. I could have rattled off numerous ratios and financial trends to show the health of the company, but this isn't a financial blog.  Accounting is more than just numbers.  Don't get me wrong I thought of spending the whole post writing about Yum! Brands defined benefit pension plan, but I even bored myself at the thought of it.

The reason Defined Benefit Pensions are interesting is they are often the last thing taught in accounting programs. They as archaic and difficult to learn as the slide rule. While no company loves its employees enough to currently offer such a plan, accounting students will be required to learn about it until the baby-boomer generation dies out.

Sources:

- Yum! Brands Annual Report 2011 

- Narizhnaya, K  "KFC Swallows Rostik's and Expands" Moscow Times September 7th, 2011