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Financial Analysis of KFC

Financial Analysis of KFC

Discuss Financial Analysis of KFC within the Financial Management forums, part of the PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT category; KFC Corporation (KFC), founded and also known as Kentucky Fried Chicken, is a chain of fast food restaurants based in ...

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Financial Analysis of KFC
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Netra Shetty
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netrashetty
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Financial Analysis of KFC - February 12th, 2011

KFC Corporation (KFC), founded and also known as Kentucky Fried Chicken, is a chain of fast food restaurants based in Louisville, Kentucky, in the United States. KFC has been a brand and operating segment, termed a concept[2] of Yum! Brands since 1997 when that company was spun off from PepsiCo as Tricon Global Restaurants Inc.
KFC primarily sells chicken pieces, wraps, salads and sandwiches. While its primary focus is fried chicken, KFC also offers a line of grilled and roasted chicken products, side dishes and desserts. Outside North America, KFC offers beef based products such as hamburgers or kebabs, pork based products such as ribs and other regional fare.[citation needed]
The company was founded as Kentucky Fried Chicken by Colonel Harland Sanders in 1952, though the idea of KFC's fried chicken actually goes back to 1930. Although Sanders died in 1980, he remains an important part of the company's branding and advertisements, and "Colonel Sanders" or "The Colonel" is a metonym for the company itself. The company adopted KFC, an abbreviated form of its name, in 1991.[3] Starting in April 2007, the company began using its original name, Kentucky Fried Chicken, for its signage, packaging and advertisements in the U.S. as part of a new corporate re-branding program;[4][5] newer and remodeled restaurants will have the new logo and name while older stores will continue to use the 1980s signage. Additionally, Yum! continues to use the abbreviated name freely in its advertising.
Yum! Brands Inc. (NYSE: YUM) is the world's largest fast food company with 35,000 restaurants in over 110 countries. Yum restaurants include KFC, Pizza Hut, Taco Bell, Long John Silvers (LJS), A&W, Pasta Bravo, Wing Street, and East Dawning. KFC, Pizza Hut, Taco Bell, and LJS are the world leaders in their respective categories. There are three operating regions as well: the US, China, and International. Yum is part of the Quick Service Restaurant (QSR) industry primarily competing with McDonald's (MCD), Domino's Pizza (DPZ), and Burger King Holdings (BKC).

As a competitor in the QSR industry, Yum must deal with commodity prices, health concerns, and intense competition. The main inputs for Yum are chicken, beef/pork, cheese, flour, produce, paper, and beverages. If commodity prices rise, intense competition makes it difficult to counter by setting higher prices. Health and obesity concerns are a constant factor in this industry. In response to these concerns, KFC is eliminating trans fat and Taco Bell is allowing customization of menu items.[1]

Yum has experienced tremendous growth overseas. Yum made China its own division in 2005 due to its overwhelming success and rapid expansion. Yum is now the dominant QSR company in mainland China with over two times as many restaurants as McDonalds. Yum now plans to make a turnaround in the US with continued re-franchising, introducing new products, and improving the overall quality of its restaurants. Given that the US still represents over 59% of Yum's revenues, a turn around in US markets has to be a priority.

Contents
1 Company Overview
1.1 Pizza Hut
1.2 Taco Bell
1.3 Long John Silvers
1.4 Q3 FY2010 Earnings Summary
1.5 Q4 FY2010 Earnings Summary
2 Key Trends and Forces
2.1 A Rising Global Middle Class Provides Business Expansion Opportunities for YUM in Emerging Markets
2.2 A Unique Approach with KFC in China has Proven Valuable for YUM's Expansionary Efforts
2.3 Despite Major Concentration in the US, YUM has Developed Turnaround Strategies in Face of a Declining Market
3 Competition
4 References
Company Overview



Pizza Hut
Pizza Hut claims the leading position in the US pizza QSR segment with a 15% market share. Pizza Hut operates in 92 countries with a total of 12,685 restaurants worldwide. There are 360 Pizza Huts in China and it is the leading casual dining brand in China. Wing Street and Pasta Bravo are two restaurant concepts that are many times paired with Pizza Hut. Wing Street or Wing Works (usually paired with KFC) features flavored chicken wings. Pasta Bravo adds a made to order pasta segment to Pizza Hut.

Taco Bell
Taco Bell claims the leading position in the US Mexican QSR segment with a 58% market share. Taco Bell operates in 14 countries with a total of 5,846 restaurants worldwide.

Long John Silvers
LJS claims the leading position in the US seafood QSR segment with a 32% market share. LJS operates in 6 countries with a total of 1,156 restaurants worldwide. Yum's multi-branding strategy often pairs LJS and A&W. A&W operates in 11 countries with 644 restaurants worldwide. A&W serves hot dogs, hamburgers, and its A&W root beer. It is the oldest fast food franchise in the US.

In January 2011, YUM announced that it hopes to sell Long John Silver's and A&W so that it could focus on its other brands in the U.S. and overseas, particularly in China.[2] Yum acquired the two chains for $320 million, but the chains have minim presence outside of the U.S. and no sites in China.[3]



Q3 FY2010 Earnings Summary
Yum Brands posted $357 million in earnings for the third reporting quarter of FY2010, a 6.9% increase compared to $334 million from third quarter FY2009.[4] Further, revenues from its stores generated about 3% increase in revenues to $2.86 billion.[5] Yum Brands associated China as its major driver for growth, as same-store sales in its stores in China went up 6% in the quarter. In comparison, all other international locations only went up approximately 1%.[6]

Yum's KFC stores in the US is still hurting, with an 8% quarterly sales drop in US restaurants.[7] While US customers have become conscious about fatty foods, KFC's Chinese customers have snapped up the products as KFC restaurants tops 3,000 and continues to grow. As the Chinese middle class continues to grow, Yum continues to capitalize by increasing delivery offerings and menu expansions. On the other hand, US sales for Pizza Hut and Taco Bell has been positive, with same-store sales at 8% increase and 3% increase, respectively.[8]


Q4 FY2010 Earnings Summary
Yum Brands posted earnings of $274 million, or $0.56 EPS, for the fourth reporting quarter of FY2010.[9] This translates to a 13% increase before foreign currency translation.[10] Excluding extraordinary items though, YUM would have earned $0.63 EPS. YUM revenues were $3.56 billion, an increase of 6.0% from $3.36 billion same quarter last year. This beat analyst consensus estimates of $3.51 billion revenue but did not beat estimates of $0.60 EPS.

YUM attributes positive growth from same-store sales, which grew 8% in China, 5% in US and 1% internationally.[11] YUM continues to rely on China for its greatest growth source, as U.S. same-store sales were mixed with an 8% increase at Pizza Hut, 2% increase at Taco Bell, but 4% decrease at KFC. Looking forward, YUM is still wary of overall inflation in commodities but is still deriving its growth through expansion. YUM opened about four restaurants a day internationally last year, with 507 new restaurants in China last year of which 262 were opened in the fourth quarter only. YUM currently has 3,906 restaurants in China, of which more than 3,200 are KFC's.[12]

Key Trends and Forces

A Rising Global Middle Class Provides Business Expansion Opportunities for YUM in Emerging Markets
YUM's KFC and Pizza Hut brands span over 110 countries worldwide; as of FY2009, the China Division, YRI and Taco Bell-U.S. represent approximately 85% of the Company’s operating profits.[13] This high international exposure is offsetting a slowdown in YUM's North American market as U.S. consumers pare back discretionary spending. YUM's the top-25 markets for KFC, Pizza Hut, Taco Bell, A&W and Long John Silver's are present in several highly coveted markets where the middle class and disposable income are growing, including high-growth markets like Mexico, South Africa, Poland and Egypt alongside a sizable presence in Asia. Yum is also well established in the developed economies of Canada, Western Europe, Japan and Australasia. Although the company faces the challenge of expanding beyond the traditional KFC and Pizza Hut brands in these markets, the company is well positioned to benefit from strong global economy and a rising, global middle class.

In order to diversify its emerging markets concentration away from China, Yum! Restaurants India plans to invest $100 million USD to more than triple the number of stores across India to 1,000 eateries by 2015. About half of the planned restaurants would be KFC outlets, which compares to currently 300 restaurants across India, most of which are under the "Pizza Hut" and "KFC" banners. The company also plns to aggressively increase the number of Taco Bell restaurants, and as teh company opens more outlets across India, it will also plan to increase employee headcount to 50,000 over the next five years.[14]

A Unique Approach with KFC in China has Proven Valuable for YUM's Expansionary Efforts
Yum's China division has produced the company's greatest growth and profitability over the last few years. Yum's earnings growth model in mainland China is expected to drive annual Operating Profit growth of 15% per year.[15] In China, KFC's growth is outpacing rival McDonalds at a rate of 3 to 1. Unlike its competitors, Yum owns its own distribution centers. Yum's 16 distribution centers allow the company to grow more efficiently as its serves to its restaurants in 402 different Chinese cities.

A major part of KFC's success in China has been Yum's approach. Compared to KFC in the US, KFC China has a more diverse menu, focuses on health by meeting with health councils in China, and involves itself in the community by sponsoring 3 on 3 basketball tournaments and creating dance programs at high schools. Yum strives to become deeply rooted in the society and trusted by the Chinese consumer. China's growth potential is still substantially untapped as Yum believes that it could have close to 20,000 restaurants in China in the future. Although, as Yum's presence in China expands and occupies the smaller cities and towns, the risk for Yum's continued success also increases.

Despite Major Concentration in the US, YUM has Developed Turnaround Strategies in Face of a Declining Market
Yum's US division accounts for 50% of total profits, but unfortunately for Yum, the US has not seen the same growth success as the overseas divisions. While there is still a lot of growth potential in China and the International division is expanding into continental Europe, Russia, and India, the US division operates in a saturated market. There are over 18,000 Yum restaurants in the US which as a population of about 300MM, whereas China has over only 2,000 restaurants and a population of 1.3 billion. The US faced a negative 5% same-store sales change system wide (company owned and franchisees) in FY2009.

Taco Bell has been Yum's best performer in the US. About 55% of the US profits come from Taco Bell. Product and branding innovation in Taco Bell, KFC, and Pizza Hut will also play an important role. KFC is also marketing lower priced products like the 99 cent Snacker to build a more value friendly image. Yum's US multi-branding strategy calls for the occasional combination of a Pizza Hut and Pasta Bravo, KFC and Wing Works, and LJS and A&W, among others. This strategy increases unit sales and makes more expensive locations plausible for Yum to occupy. Yum is dependent on the success of its US division and its turnaround strategies aims at increasing the growth and profitability of this important division.

Competition

The QSR segment is a crowded and intense environment. Yum's diverse portfolio of restaurants attracts competition from many different types of quick service restaurants. McDonald's (MCD) is Yum's largest global competitor. MCD is the leader in the US QSR segment and is growing in China. KFC is the dominant player in the chicken QSR segment with its closest competitor as Popeye's. Although, increased chicken choices at burger joints like McDonalds, Burger King, and Wendy's are also grabbing sales from KFC. Pizza Hut has received significant competition from Domino's Pizza (DPZ) and Papa John's over the last few years and they have been keeping Pizza Hut's sale growth down.

From a market perspective Yum faces its fiercest competition in the US. This is due in large part to the fact that US market is extremely saturated with QSRs. Overseas, Yum has a very strong position and plans to expand its already very successful International division into continental Europe, Russia, and India.

The table below shows fiscal 2009 data for the largest publicly traded food service competitors by revenues. Subway and Dunkin' Donuts, also a major players, are privately owned.

Company Revenues (M) Net Income (M) Net Margin Restaurants Franchised %
McDonald's (MCD) $22,745 $4,551 20.0% 32,478 81%
Yum! Brands (YUM) $10,836 $1,083 10.0% 37,000
Starbuck’s (SBUX) $9,775 $391 4.0% 16,635 47%
Darden Restaurants (DRI) $7,218 $372 5.2% 1,773 0%
Brinker International (EAT) $3,621 $79 2.2% 1,689 40%
Wendy's International (WEN) $3,581 $4 0.1% 6,451 80%
Burger King Holdings (BKC) $2,537 $200 7.9% 11,925 88%
Jack in the Box (JACK) $2,471 $131 5.3% 2,212 46%
CKE Restaurants (CKR) $1,419 $48 3.4% 3,141 71%
Domino's Pizza (DPZ) $1,404 $80 5.7% 9,339 91%
Panera Bread Company (PNRA) $1,353 $87 6.4% 1,380 58%
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Last edited by netrashetty; February 12th, 2011 at 10:13 AM..
   
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