Yum! Brands Inc. should gain a tighter focus on its largest, core brands and their growth potential with the sale of Long John Silver’s and A&W All-American Food, two chains that have been stagnant for years, analysts said.
After news of the proposed deal or deals hit Tuesday morning, analysts noted that the sell off should have no real impact on the Louisville, Ky.-based company’s financial outlook, from earnings to cash flow. Any proceeds from the divestures would cancel any future earnings from the brands.
EARLIER: Yum to sell Long John Silver’s, A&W
“We view the announcement that Yum intends to sell its Long John Silver’s and A&W brands positively, as the move should allow for greater focus on core brands and growth opportunities,” David Tarantino of R.W. Baird & Co. said in a note to investors. “While a transaction seems likely to provide strategic benefits of focus, the proposed sale of these brands is not expected to have a material impact on earnings per share estimates.”
Yum acknowledged Tuesday that Long John Silver’s and A&W, which collectively account for 1,630 franchised units and about $900 million in U.S. systemwide sales, no longer factored into the company’s long-term plans, which focus on the expansion of its China and Yum Restaurants International divisions. Yum’s international operations account for about 65 percent of the company’s profits, while one analyst noted that Long John Silver’s and A&W together account for less than 1 percent of the company’s operating profit.
Tarantino said there is plenty of growth upside for Yum’s big three — KFC, Pizza Hut and Taco Bell — either in China and other emerging markets as well as through domestic initiatives like daypart expansion and refranchising. Long John Silver’s and A&W just didn’t compare.
Yum purchased Long John Silver’s and A&W for $320 million in 2002, expressing at the time an interest in using the concepts for co-branding with its core chains. Many restaurants were opened as multi-branded locations, the future of which is now unclear.
Virginia Ferguson, Yum’s director of corporate communications, told Nation’s Restaurant News in an e-mail that the fate of co-branded locations housing an A&W or a Long John Silver’s had not been decided yet.
“It’s far too early to explore that, since we just today announced that we’re going to be seeking a new buyer or buyers,” Ferguson wrote Monday. “We’re committed to running the company-owned stores and will work with the new owner or owners to address these questions, but it’s premature to consider that now.”
Securities analyst Steve West of Stifel Nicolaus noted that the divestures of the two brands would allow Yum’s U.S. officers to concentrate on revitalizing KFC, Taco Bell and Pizza Hut in the United States, where growth has not been as great as overseas. Domestic same-store sales fell 1 percent during Yum’s latest quarter, a combined result that reflected increases of 8 percent at Pizza Hut and 3 percent at Taco Bell, but a decline of 8 percent at KFC.
Yum’s recent moves to prop up Pizza Hut included a simplified pricing structure, including $10 large pizzas and $12 specialty pizzas. The pricing change helped turn around perceptions of the chain being too expensive, chief executive David Novak said during the company’s investor conference in December. The company also plans to push ahead with its refranchising efforts at KFC. In addition, Yum has identified Taco Bell, which is the most profitable of the three brands in the United States, as a long-term growth vehicle capable of reaching 8,000 domestic locations.
Louisville, Ky.-based Yum currently operates or franchises more than 37,000 restaurants in more than 110 countries.
Contact Mark Brandau at [email protected].