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Financial Statement Analysis Case 3: YUM Brands Segments and Common-Size Analysis Find the data for this case in the Excel file “3

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Financial Statement Analysis

Case 3: YUM Brands Segments and Common-Size Analysis Find the data for this case in the Excel file “3. YUM Segments Data.xlsx”.

The Management Discussion and Analysis section (Item 7) of Yum! Brands’ FY19 10-K reports the following:

Yum! Brands, Inc. franchises or operates a worldwide system of over 50,000 restaurants in more than 150 countries and territories, primarily under the concepts of KFC, Pizza Hut and Taco Bell (collectively, the “Concepts”). These three Concepts are global leaders of the chicken, pizza and Mexican-style food categories, respectively. Of the over 50,000 restaurants, 98% are operated by franchisees.

As of December 31, 2019, YUM consists of three operating segments:

1. The KFC Division which includes the worldwide operations of the KFC concept,
2. The Pizza Hut Division which includes the worldwide operations of the

Pizza Hut concept, and

3. The Taco Bell Division which includes the worldwide operations of the Taco Bell concept.

The MD&A section also discloses the following regarding accounting for the refranchising strategy:

We have reflected as Special Items those refranchising gains and losses that were recorded in connection with or prior to our previously announced plans to have at least 98% franchise restaurant ownership by the end of 2018. As such, refranchising gains and losses recorded during 2019 as Special Items primarily include gains or losses associated with sales of underlying real estate associated with stores that were franchised as of December 31, 2018 or true-ups to refranchising gains and losses recorded prior to December 31, 2018. During the years ended December 31, 2019, 2018 and 2017, we recorded net refranchising gains of $12 million, $540 million and $1,083 million, respectively, that have been reflected as Special Items.

Footnote 18, which contains the results of reportable operating segment that are included in the Excel spreadsheet, reports that the net refranchising gains amounts… are not allocated to KFC, Pizza Hut, or Taco Bell; those amounts are instead listed as “corporate/unallocated”.

 

Use the data in tab “YUM segments” to answer the questions below. Ignore the effect of taxes.

1. What percentages of the total of the following does each of the three Yum! operating segments represent in FY17, FY18, and FY19? (For example, the KFC segment was 53% of Yum!’s total FY17 revenue.) Present your results numerically, but also present your results graphically in a way that provides for the most informative visualization. Note any trends.
   1. Total YUM revenue
   2. Total YUM operating income
   3. Total YUM capital spending

 

2. What is the FY16-FY19 CAGR in revenue, operating income, and capital spending for KFC, Pizza Hut, Taco Bell, and Yum! overall? What do you make of your findings?

 

3. For FY17, FY18, and FY19, compute KFC’s, Pizza Hut’s, and Taco Bell’s. Present your results numerically and graphically, and note any trends: 
   1. Profit margin 
   2. Asset turnover
   3. Return on assets

i. Use “Operating Income” for your numerator since net income is not available on a segment level. ii. Use average “Identifiable Assets” for your denominator since total assets is not disclosed for each segment.

 

4. Based on your analysis above, answer the following about Yum! segments in FY17, FY18, and FY19:
   1. Which segment is the largest?
   2. In your judgment, which segment is performing the best? Justify your answer.
   3. The “Corporate/Unallocated” segment amount for Operation income was large and positive in FY17 and FY18 due to Yum!’s recording of accounting gains on “refranchising” restaurants. What is the relevance of those accounting gains to forecasting Yum!’s results in FY20 and beyond?

 

5. Yum! discloses that its fiscal 2019 “included a 53^rd week for all of our U.S. and certain international subsidiaries that operate on a period calendar.” In light of this, what adjustments would be you need make to your work above? (You do not need recompute any numbers; a qualitative answer will suffice. But be sure to address whether and how each of the answers in questions 1., 2., and 3. would need to be adjusted.)