Lowering estimates further after developed market deep dive › sites › default › files › YUM US deep... · growth. We lower our 2011/2012/2013 estimates to $2.80/$3.15/$3/60

August 1, 2011

COMPANY UPDATE Yum! Brands, Inc. (YUM)

Sell Equity Research

Lowering estimates further after developed market deep dive

What's changed

We reiterate our Sell rating on YUM after performing an in-depth analysis

of the company’s developed market businesses. We see the potential for

prolonged and possibly accelerated weakness in US/Europe, which will

offset some of YUM’s successes in China and other emerging markets.

Implications

We believe investors may be overly optimistic in giving YUM a free pass

on weak developed market results. Our analysis suggests ongoing

weakness in developed markets is likely, and that it will continue to limit

growth. We lower our 2011/2012/2013 estimates to $2.80/$3.15/$3/60 from

$2.86/$3.18/$3.65 to reflect lower US/Europe SSS assumptions and a

decline in US unit count as franchisees are increasingly likely to exit.

We expect YUM to highlight its emerging market business at its YRI

investor day. However, four of YRI’s top five markets by unit count are

developed. As such we expect YRI growth to remain tepid.

Poor US Taco Bell years have historically come in bunches. In

addition, competitive pressures in Mexican have intensified. We see

the potential for another weak year in 2012.

We believe KFC US is in a negative feedback loop and expect

accelerated declines in the coming years. In addition Pizza Hut

margins will continue to get squeezed from competitive pressure.

Valuation

We lower our P/E and DCF-based 12 month price target by $1 to $50 to

reflect our lower EPS estimates. This is 16x our new 2012 EPS estimate.

Key risks

The primary risk to our negative thesis is outperformance in China, which

could overwhelm developed market declines. An impending middle-class

income tax cut in particular could drive higher than expected China SSS.

INVESTMENT LIST MEMBERSHIP

Americas Sell List

Coverage View: Neutral

Michael Kelter (212) 934-4252 [email protected] Goldman Sachs & Co. Goldman Sachs does and seeks to do business with companies

covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC see the end of the text. For other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Chris Cerrone (917) 343-5320 [email protected] Goldman Sachs & Co.

The Goldman Sachs Group, Inc. Global Investment Research

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

Growth

Investment Profile

Low High

Percentile 20th 40th 60th 80th 100th

* Returns = Return on Capital For a complete description of the

investment profile measures please refer to

the disclosure section of this document.

Yum! Brands, Inc. (YUM)

Americas Consumer Group Peer Group Average

Key data Current

Price ($) 52.66

12 month price target ($) 50.00

Market cap ($ mn) 25,487.4

12/10 12/11E 12/12E 12/13E

Revenue ($ mn) New 11,343.0 12,224.0 12,842.4 13,794.1

Revenue ($ mn) Old 11,343.0 12,159.4 12,685.7 13,559.9

EPS ($) New 2.52 2.80 3.15 3.60

EPS ($) Old 2.52 2.86 3.18 3.65

P/E (X) 20.9 18.8 16.7 14.6

EV/EBITDA (X) 9.1 10.4 9.4 8.4

ROE (%) 88.2 75.0 72.5 72.5

6/11 9/11E 12/11E 3/12E

EPS ($) 0.66 0.83 0.69 0.69

Price performance chart

40

42

44

46

48

50

52

54

56

58

Aug-10 Nov-10 Feb-11 May-11

1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,350

1,400

1,450

Yum! Brands, Inc. (L) S&P 500 (R)

Share price performance (%) 3 month 6 month 12 monthAbsolute (1.8) 11.1 27.5

Rel. to S&P 500 4.0 12.8 9.1

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/01/2011 close.

August 1, 2011 Yum! Brands, Inc. (YUM)

Yum! Brands, Inc.: Summary Financials

Analyst Contributors

Michael Kelter

[email protected]

Chris Cerrone

[email protected]

Goldman Sachs Global Investment Research 2

Profit model ($ mn) 12/10 12/11E 12/12E 12/13E Balance sheet ($ mn) 12/10 12/11E 12/12E 12/13E

Total revenue 11,343.0 12,224.0 12,842.4 13,794.1 Cash & equivalents 1,426.0 1,040.1 1,232.3 1,406.7

Cost of goods sold (8,120.0) (8,790.4) (9,135.6) (9,768.6) Accounts receivable 256.0 256.0 256.0 256.0

SG&A (1,277.0) (1,341.7) (1,389.3) (1,454.2) Inventory 189.0 189.0 189.0 189.0

R&D -- -- -- -- Other current assets 442.0 492.0 492.0 492.0

Other operating profit/(expense) (100.0) (135.0) (163.2) (173.4) Total current assets 2,313.0 1,977.1 2,169.3 2,343.7

ESO expense -- -- -- -- Net PP&E 3,830.0 4,038.3 4,271.0 4,529.5

EBITDA 2,435.0 2,563.5 2,779.2 3,041.6 Net intangibles 1,134.0 1,134.0 1,134.0 1,134.0

Depreciation & amortization (589.0) (606.7) (624.9) (643.6) Total investments 154.0 154.0 154.0 154.0

EBIT 1,846.0 1,956.8 2,154.3 2,397.9 Other long-term assets 885.0 635.0 460.0 285.0

Net interest income/(expense) (175.0) (152.7) (159.8) (162.3) Total assets 8,316.0 7,938.4 8,188.2 8,446.2

Income/(loss) from associates 0.0 0.0 0.0 0.0

Others 0.0 0.0 0.0 0.0 Accounts payable 1,602.0 1,602.0 1,602.0 1,602.0

Pretax profits 1,671.0 1,804.1 1,994.6 2,235.7 Short-term debt 673.0 673.0 673.0 673.0

Provision for taxes (424.0) (433.5) (480.0) (538.0) Other current liabilities 173.0 173.0 173.0 173.0

Minority interest (20.0) (16.0) (16.0) (16.0) Total current liabilities 2,448.0 2,448.0 2,448.0 2,448.0

Net income pre-preferred dividends 1,227.0 1,354.6 1,498.6 1,681.6 Long-term debt 2,915.0 2,265.0 2,265.0 2,265.0

Preferred dividends 0.0 0.0 0.0 0.0 Other long-term liabilities 1,284.0 1,284.0 1,284.0 1,284.0

Net income (pre-exceptionals) 1,227.0 1,354.6 1,498.6 1,681.6 Total long-term liabilities 4,199.0 3,549.0 3,549.0 3,549.0

Post tax exceptionals (71.0) 0.0 0.0 0.0 Total liabilities 6,647.0 5,997.0 5,997.0 5,997.0

Net income (post-exceptionals) 1,156.0 1,354.6 1,498.6 1,681.6

Preferred shares 0.0 0.0 0.0 0.0

EPS (basic, pre-except) ($) 2.59 2.88 3.24 3.70 Total common equity 1,669.0 1,941.4 2,191.2 2,449.2

EPS (diluted, pre-except) ($) 2.52 2.80 3.15 3.60 Minority interest 0.0 0.0 0.0 0.0

EPS (basic, post-except) ($) 2.44 2.88 3.24 3.70

EPS (diluted, post-except) ($) 2.38 2.80 3.15 3.60 Total liabilities & equity 8,316.0 7,938.4 8,188.2 8,446.2

Common dividends paid (412.0) (507.2) (573.7) (648.7)

DPS ($) 0.92 1.05 1.21 1.39

Dividend payout ratio (%) 35.5 36.4 37.2 37.5 Additional financials 12/10 12/11E 12/12E 12/13E

Net debt/equity (%) 129.5 97.8 77.8 62.5

Interest cover (X) 9.5 11.5 12.5 13.8

Growth & margins (%) 12/10 12/11E 12/12E 12/13E Inventory days 7.0 7.8 7.6 7.1

Sales growth 4.4 7.8 5.1 7.4 Receivable days 8.0 7.6 7.3 6.8

EBITDA growth 13.2 5.3 8.4 9.4 BVPS ($) 3.52 4.13 4.74 5.39

EBIT growth 17.4 6.0 10.1 11.3

Net income (pre-except) growth 17.1 10.4 10.6 12.2 ROA (%) 15.9 16.7 18.6 20.2

EPS growth 16.3 11.3 12.5 14.2 CROCI (%) 32.9 32.2 31.5 31.2

Gross margin 28.4 28.1 28.9 29.2

EBITDA margin 21.5 21.0 21.6 22.0 Dupont ROE (%) 73.5 69.8 68.4 68.7

EBIT margin 16.3 16.0 16.8 17.4 Margin (%) 10.8 11.1 11.7 12.2

Turnover (X) 1.4 1.5 1.6 1.6

Cash flow statement ($ mn) 12/10 12/11E 12/12E 12/13E Leverage (X) 5.0 4.1 3.7 3.4

Net income 1,178.0 1,354.6 1,498.6 1,681.6

D&A add-back (incl. ESO) 589.0 606.7 624.9 643.6 Free cash flow per share ($) 2.52 2.20 2.56 2.95

Minority interest add-back (20.0) (16.0) (16.0) (16.0) Free cash flow yield (%) 5.9 4.2 4.9 5.6

Net (inc)/dec working capital 152.0 0.0 0.0 0.0

Other operating cash flow 90.0 (59.0) (34.0) (34.0)

Cash flow from operations 1,989.0 1,886.3 2,073.4 2,275.3

Capital expenditures (796.0) (850.0) (892.5) (937.1)

Acquisitions (62.0) 0.0 0.0 0.0

Divestitures 298.0 185.0 135.0 135.0

Others (19.0) 0.0 0.0 0.0

Cash flow from investing (579.0) (665.0) (757.5) (802.1)

Dividends paid (common & pref) (412.0) (507.2) (573.7) (648.7)

Inc/(dec) in debt 313.0 (650.0) 0.0 0.0

Other financing cash flows (238.0) (450.0) (550.0) (650.0)

Cash flow from financing (337.0) (1,607.2) (1,123.7) (1,298.7)

Total cash flow 1,073.0 (385.9) 192.2 174.4

Note: Last actual year may include reported and estimated data.

Source: Company data, Goldman Sachs Research estimates.



Contents

PM Summary: Lowering estimates further on US weakness 3

Brief YRI analyst day preview: Expect an emerging markets focus 4

US weakness may persist longer than expected 6

(1) Taco Bell poor SSS tends to come in bunches 10

(2) Brand Equity Concerns 11

(3) The Mexican competitive environment is heating up 12

KFC caught in a negative feedback loop 14

(1) Brand Equity issues leading to market share losses 15

(2) KFC advertising support levels are declining 17

(3) Franchisees are closing restaurants 18

Pizza Hut has been flat or down in 10 of the last 18 years 19

PM Summary: Lowering estimates further on US weakness

We expect YUM’s weak US/Europe results to continue for the next several years,

partially offsetting the company’s successes in China and in other emerging markets.

While China and YRI are clearly the future growth engines of the company, the US

segment is still important to near-term financial results. As such, we have

performed an in-depth analysis of YUM’s US business and are lowering estimates as

a result. We reiterate our Sell rating and lower our 12-month price target to $50

from $51.

Brief YRI analyst day preview – YUM is hosting investors for its YRI analyst day on

August 2-3. We expect management to focus primarily on operations in emerging

markets. However, we are also looking for YUM to discuss the ongoing weakness in some

of its largest developed markets which have been offsetting the emerging market

successes and keeping YRI SSS growth depressed.

Weak US results may be prolonged – We lower our US SSS and unit count estimates to

reflect increased pessimism around YUM’s US business. We believe consensus SSS

estimates for the US business are overly optimistic, and believe unit counts may see

declines in the coming years as franchisees exit the business. As a result, we believe

YUM’s company profit growth may stagnate at roughly 10% in the coming years despite

increasing exposure to fast growing China (see Exhibit 1).

In-depth analysis of YUM’s three core US brands – We have performed an in-depth

analysis of the issues facing Taco Bell, KFC and Pizza Hut in the US. This section is meant

to guide investors through the key pressure points for each brand.

China income tax cut a risk to our Sell call – China is lowering tax rates for the low-

middle income groups. If this stimulus drives a spike in YUM’s China SSS, strength in that

division could overwhelm the US declines.



Exhibit 1: US declines will be a drag on YUM’s growth for several years Segment operating profit dollar growth (% chg vs. YAG) by year

Source: Company data, Goldman Sachs estimates

Brief YRI analyst day preview: Expect an emerging markets focus

YRI holding an analyst day on August 2-3 – Yum is hosting investors for a YRI analyst

day on August 2-3. YUM’s YRI division has 14,500+ restaurants in both emerging and

developed international markets, and generates roughly 25% of revenue and 33% of

operating profit.

We expect a focus on emerging markets – We expect the analyst day to focus primarily

on operations in emerging markets, which account for roughly half of YRI units (see

Exhibit 2). When one includes China, we estimate that 30% of YUM’s units are now

located in emerging markets, putting YUM in a class of its own.

Looking for color on developed markets – While YUM will focus primarily on emerging

markets, we will also be looking for management to address the ongoing weakness in

some of YRI’s large developed markets. The top four markets within YRI are Japan, UK,

Canada and Australia; all “developed” countries which have faced challenges in the

recent past (see Exhibit 3). Weakness in these countries has offset growth elsewhere and

has prevented SSS from recovering to pre-recession levels (see Exhibit 4).

And Pizza Hut UK in particular – Pizza Hut UK remains one of the most challenged sub-

segments within YRI. Since 2001, Pizza Hut’s share has declined from 23% to 16% while

Domino’s increased its share from 7% to 20% (see Exhibit 5). The declines continued in

2Q with PH SSS -7.0% vs. +3.4% at DPZ UK in 1H11. This is particularly concerning as the

UK is the second largest market in YRI, and Pizza Hut makes up half of the country’s units.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2003

2004

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

2014E

YRI China US Total



Exhibit 2: 50% of YRI units are in emerging markets

Exhibit 3: Top four YRI countries are developed markets

Top 10 YRI markets by number of units

Source: Goldman Sachs Research, Company data,

Source: Goldman Sachs Research, Company data

Exhibit 4: YRI not back to pre-recession levels YRI SSS, 1Q05 – 4Q12E

Exhibit 5: Pizza Hut UK losing significant share Pizza Hut vs. Domino’s market share, UK

Source: Company data, Goldman Sachs Research

Source: Euromonitor, Goldman Sachs Research

Little visibility to YRI acceleration despite emerging market push – Based on our

bottoms up modeling, we do not forecast an improvement in YRI’s growth rate in the

near-intermediate term. Our assumptions include 3-4% annual SSS growth, a

continuation of 4% new unit growth/year and 50-75 bp of restaurant level margin

improvement/year (see Exhibit 6).

Developed, 7,091 units

Emerging, 6,973 units

200

400

600

800

1,000

1,200

1,400

1,600

Jap

an

Gre

at

Bri

tain

Can

ad

a

Au

str

ali

a

Mala

ysia

So

uth

Afr

ica

Ind

on

esia

Mexic

o

Th

ail

an

d

Ko

rea

Un

its

Emerging

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11E

4Q11E

YR

I SS

S

Avg: 4%

5%

10%

15%

20%

25%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Pizza Hut

Domino's



Exhibit 6: We do not forecast an acceleration in YRI operating profit dollar growth YRI division operating profit (% chg vs. YAG)

Source: Company data, Goldman Sachs Research estimates

US weakness may persist longer than expected

US importance underappreciated – YUM’s US operations remain crucial to total

company results as YUM still has almost 20,000 units in the US, 5x as many as in China

(see Exhibit 7). The company still earns 20-30% of its EBIT domestically, and profits have

been declining at a double digit pace each year.

US results may decelerate further from here – We believe YUM’s US operations may

have hit a critical threshold, whereby particularly weak recent results devolve into a

negative feedback loop. The highest potential area of future weakness is an acceleration

in US units closures. There has been a step up in US unit closures in 2011(see Exhibit 8),

and we expect an increasing number of franchisees to similarly close their doors over the

coming years.

Exhibit 7: YUM has 4-5x as many units in the US as in

China Number of restaurants by market

Exhibit 8: YUM’s US units are in decline, and future

closures may accelerate from here YUM’s total US unit count by year


Source: Company data, Goldman Sachs Research estimates

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

2003

2004

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

2014E

18,830

3,664

1,505 1,465 1,165 871

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

US China Japan UK Canada Australia

16,000

16,500

17,000

17,500

18,000

18,500

19,000

19,500

20,000

20,500

21,000

2003

2004

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

2014E



Restaurant closures due to lack of profitability to franchisees – YUM is over 80%

franchised in the US market, as such it is reliant on franchisees maintaining and operating

restaurants. Since YUM’s US SSS have averaged just 0.8% over the past decade (see

Exhibit 9), while inflation has averaged 2-3% over that period, US restaurant margins have

declined from 15.1% in 2001 to 10.7% in 2011E (see Exhibit 10). As this is the average

restaurant margin, roughly 50% of stores are going to be below this figure, and an

increasing number are going to be cash flow negative. These restaurants are likely to

continue to be closed by franchisees.

Exhibit 9: YUM’s top-line growth has not kept up with

inflation over the last decade YUM US SSS vs. CPI, 2001-2012E

Exhibit 10: YUM’s US restaurant level margins are at

dangerously low levels, franchisees may bail YUM’s US restaurant level margins

Source: Goldman Sachs Research, BLS, Company data

Source: Goldman Sachs Research estimates

Refranchising has obscured the profitability declines on US EBIT – We believe that

part of the reason the weakness in the US does not attract as much attention is that EBIT

margins declines have been masked by the aesthetics of refranchising. Reported 2010

EBIT margins appear 150bp+ higher than in 2000. However, when the impact of

refranchising is backed out, we found that underlying EBIT margins have declined by (500

bp) over that period (see Exhibits 11 and 13).

However, refranchising is running out of steam – Since 1997, YUM has significantly

reduced the number of KFC and Pizza Hut units that it operates directly. Pizza Hut

ownership declined from 45% to 5%, while KFC went from 35% to 15% (see Exhibit 12). At

this point, Pizza Hut refranchising has been completed and we see limited runway for KFC.

As this margin tailwind dissipates, underlying margin declines will become more obvious.

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011E

2012E

10yr avg = 0.8%

CPI = 2.6%

8%

10%

12%

14%

16%

18%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

2014E

YU

M U

S R

esta

ura

nt

marg

in



Exhibit 11: Refranchising has obscured YUM US

operating margin trajectory over the past decade US operating margins as reported vs. estimate excluding the

impact from refranchising

Exhibit 12: We see limited runway for KFC refranchising

while Pizza Hut refranchising has been completed Percent of units company-owned



Exhibit 13: YUM’s US margin declines have been masked by the aesthetics of refranchising Estimated impact of YUM’s US refranchising over the past 10yrs

Source: Company data, Goldman Sachs Estimates

Lowering our US estimates to reflect our increased pessimism – We have lowered our

US estimates to reflect increased pessimism around YUM’s US business. This includes

both lower SSS as well as lower unit counts as we expect franchise closings to increase

over time. We are below consensus on SSS for the remainder of 2011 and into 2012 (see

Exhibit 14).

EPS below consensus for 2011 and 2012 – Our revised EPS estimates are 2% below

consensus in 2011, 2012 and 2013 as continued erosion in the US business and other

developed markets serves to offset successes elsewhere in the P&L (see Exhibit 15).

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

US

oper

atin

g m

argi

ns

Reported margins

Margins excluding ref ranchising 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

% o

f d

oo

rs c

om

pan

y o

wne

d

KFC

Pizza Hut

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010RevenuesDecreased Company sales -838 -483 -214 -148 -241 -240 -377 -449 -300 -640Increased Franchise and license fees and income 39 21 4 1 7 8 14 20 16 36Decrease in total revenues -799 -462 -210 -147 -234 -232 -363 -429 -284 -604

Operating ProfitDecreased Restaurant profit -90 -67 -23 -18 -18 -22 -38 -39 -19 -63Increased Franchise and license fees and income 39 21 4 1 7 8 14 20 16 36Decreased G&A 11 5 1 0 0 1 1 7 7 14Increase (decrease) in Operating profit -40 -41 -18 -17 -11 -13 -23 -12 4 -13

Impact to US segment marginsReported margins 14.4% 15.0% 14.4% 13.5% 13.1% 13.7% 14.2% 12.5% 14.5% 16.2%Impact of refranchising (cume) 0.5% 0.8% 0.7% 0.9% 1.0% 1.5% 2.3% 2.3% 4.0% 5.4%

--- --- --- --- --- --- --- --- --- ---Margins excluding refranchising 13.9% 14.2% 13.7% 12.6% 12.1% 12.2% 11.9% 10.2% 10.5% 10.8%



Exhibit 14: We are below consensus on YUM US SSS

YUM US SSS, GS vs. consensus

Exhibit 15: We are below consensus on 2011-2013 EPS

GS vs. consensus

Source: Consensus Matrix, Goldman Sachs Research estimates

Source: Consensus Matrix, Goldman Sachs Research

EPS misses could drive multiple contraction – YUM shares currently trade at a

premium to their long-term relative NTM P/E multiple (see Exhibit 16). YUM is also

trading at a historically high premium to MCD (see Exhibit 17). We believe EPS misses

could result in this premium valuation eroding, especially in light of the MCD’s recent

strong worldwide execution.

Exhibit 16: YUM is trading at a premium to its historical

relative NTM P/E multiple YUM relative NTM multiple vs. S&P 500

Exhibit 17: YUM is also trading at a premium to MCD

despite US weakness and recent worldwide strength at

MCD YUM and MCD NTM P/E multiples

Source: Factset, Company data

Source: Factset, Company data

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

3Q11 4Q11 2011 2012

SS

S e

stim

ate

GS

Consensus

2011 2012 2013Revenue (GS) 12,224 12,842 13,794

Revenue (Consensus) 12,191 12,852 13,932

% difference 0% 0% -1%

EPS (GS) 2.80 3.15 3.60

EPS (Consensus) 2.86 3.21 3.69

% difference -2% -2% -2%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Oct-

97

Oct-

98

Oct-

99

Oct-

00

Oct-

01

Oct-

02

Oct-

03

Oct-

04

Oct-

05

Oct-

06

Oct-

07

Oct-

08

Oct-

09

Oct-

10

LT avg

10

12

14

16

18

20

22

24

Dec‐02

Jun‐03

Dec‐03

Jun‐04

Dec‐04

Jun‐05

Dec‐05

Jun‐06

Dec‐06

Jun‐07

Dec‐07

Jun‐08

Dec‐08

Jun‐09

Dec‐09

Jun‐10

Dec‐10

Jun‐11

MCD

YUM



Taco Bell: Analysis suggests issues may go beyond beef lawsuit

Taco Bell is the most important US concept – Taco Bell is the cornerstone of YUM’s US

operations as it accounts for roughly two thirds of YUM’s US EBIT, with the remaining

third split between Pizza Hut and KFC (see Exhibit 18). On a profit per unit basis, YUM

generates 9x and 3x as much per Taco Bell as it does per KFC and Pizza Hut given higher

company ownership mix and better unit economic (see Exhibit 19). Taco Bell SSS has

been very disappointing in 2011 at 0% in 1Q and -5% in 2Q. These results have been

attributed to a highly publicized lawsuit filed mid-1Q that made accusations about the

quality of Taco Bell’s beef. We believe these weak results may also reflect structural

challenges to the business.

Exhibit 18: Taco Bell accounts for 2/3rd of US EBIT

Estimated EBIT contribution by US concept

Exhibit 19: EBIT per unit is substantially higher at TB

EBIT per unit (2010)



(1) Taco Bell poor SSS tends to come in bunches

2011 results have not been huge departure from long-term trends – From 1994-2010,

Taco Bell SSS have averaged only 1% and have been flat or negative in 8 of those 17

years. We find this troubling given that Taco Bell is widely viewed as the healthiest of

YUM’s US brands.

SSS declines have come in bunches – Taco Bell SSS declines have historically come in

bunches (see Exhibit 20). We believe this is because restaurants can fall into negative

feedback loops where poor results set into motion a domino effect of other issues that

can result in further weakness in results. These potential issues include cuts in ad support,

franchisee dissatisfaction and/or substandard new products being rushed to market. If the

beef lawsuit set one such cycle in motion, these poor results may not be as fleeting as

consensus expectations suggest.

Taco Bell

65%

Pizza Hut

28%

KFC

7%

0

50

100

150

200

250

Taco Bell Pizza Hut KFC Total



Exhibit 20: Taco Bell SSS declines come in bunches Taco Bell US SSS, 1994-2Q11.

Source: Company data

(2) Brand Equity Concerns

Taco Bell brand equity remains at the bottom of our coverage –Taco Bell remains

near the bottom of our coverage universe in terms of brand equity after suffering brand

damage from the beef lawsuit (see Exhibit 21). We believe this is cause for concern given

the strong relationship we have found between brand equity scores and same-store sales

(see Exhibit 22). We believe this relationship is intuitive, as restaurant patronage is

fundamentally a brand vs. brand decision. With this in mind, we do not expect to Taco

Bell SSS to show dramatic improvement in the near-term or extend above its historical

average in the long run unless brand equity improves.

Exhibit 21: Taco Bell brand equity near bottom of

coverage group GS Brand Equity Score, 2Q11 survey

Exhibit 22: Brand equity is strongly correlated with SSS

Brand equity scores vs. SSS, both average 4Q10-2Q11

Source: Goldman Sachs Brand Equity Survey of 2,000

Source: Goldman Sachs Brand Equity Survey of 2,000, Company data

Taco BellPeriod US SSS1994 2%1995 -4%1996 -2%1997 2%1998 3%1999 0%2000 -5%2001 0%2002 7%2003 2%2004 5%2005 7%2006 -1%2007 -5%2008 9%2009 -1%2010 2%

2011 YTD -3%2012 ?

ConceptsGS Brand

Equity ScorePanera 68Chipotle 66Starbucks 63Wendy's 62Tim Horton's 62McDonalds 59Taco Bell 59KFC 57Pizza Hut 56

-10%

-5%

0%

5%

10%

15%

50

55

60

65

70

75

Pan

era

Ch

ipo

tle

Sta

rbu

cks

Tim

Ho

rto

n's

Wen

dy's

McD

on

ald

s

Taco

Bell

Piz

za H

ut

KFC

Sam

e-st

ore

sale

s

Bra

nd

Eq

uit

y S

co

re

Brand Equity (4Q10-2Q11)

SSS (4Q10-2Q11)



Taco Bell scores poorly on “Buzz Factor” and food quality – Digging down, Taco Bell

scores near the bottom of its QSR/Fast Casual peer group on two key components of

restaurant brand equity: 1) Buzz Factor - the propensity to recommend the chain to others,

and 2) Food quality (see Exhibits 23 and 24). We view restaurant buzz factor as an

important driver of traffic and repeat visitation, while consumers consistently rank food

quality as the #1 reason they choose one restaurant over another in our brand survey.

Exhibit 23: Taco Bell “Buzz Factor” at low end of peers

“Buzz Factor” score, average of 4Q10-2Q11 surveys

Exhibit 24: Perceived food quality scores also at low end

Food quality score, average of 4Q10-2Q11 surveys



(3) The Mexican competitive environment is heating up

Mexican competition intensifying – Over the past decade, the competitive environment

in the Mexican QSR/Fast Casual space has intensified significantly. Taco Bell went from

having only a couple major competitors to at least five, with Chipotle the most formidable.

Competitor unit growth in the category has outpaced Taco bell every year since 2003, and

over this period Taco Bell’s share has fallen from 30% to 26% (see Exhibit 25).

Competition from Chipotle is a long-term threat – In the early days, Chipotle may not

have been a significant threat given its small size. Today, however, Chipotle is starting to

reach a critical mass (see Exhibit 26).

20

30

40

50

60

70

Pan

era

Ch

ipo

tle

Tim

Ho

rto

n's

Qd

ob

a

Sta

rbu

cks

Su

bw

ay

So

nic

Qu

izn

os

Pap

a J

oh

n's

Wen

dy's

Piz

za H

ut

Arb

y's

Jack in

th

e B

ox

KFC

Taco

Bell

Do

min

o's

Bu

rger

Kin

g

McD

on

ald

s

Bu

zz F

acto

r

70

75

80

85

90

95

Pan

era

Ch

ipo

tle

Tim

Ho

rto

n's

Qd

ob

a

Sta

rbu

cks

Su

bw

ay

Pap

a J

oh

n's

Qu

izn

os

Piz

za H

ut

So

nic

Arb

y's

Wen

dy's

Jack in

th

e B

ox

KFC

Do

min

o's

Bu

rger

Kin

g

Taco

Bell

McD

on

ald

s

Foo

d q

ual

ity

sco

re



Exhibit 25: Taco Bell’s share of all Mexican restaurant

units is on the decline from increasing competition Taco Bell % share of Mexican restaurant units

Exhibit 26: CMG is becoming a relevant force

Estimates sales of Taco Bell vs. Chipotle, 2005-2014E

Source: NPD Re-count, Goldman Sachs Research

Source: Technomic, Goldman Sachs Research estimates, Company data

Both Taco Bell and Chipotle appeal to the 18-34 age demographic – The biggest push

back we foresee to this argument is that Chipotle and Taco Bell have fundamentally

different consumers. However, our analysis using our restaurant brand survey suggests

that there is actually a significant overlap. We identify core consumers by their conversion

scores (% who have visited recently / % awareness). On this basis, the core consumer of

both Chipotle and Taco Bell falls within the 18-24 and 25-34 age demographics (see

Exhibits 27 and 28). Affinity for both brands trails off as consumer age increases.

Exhibit 27: Taco Bell core customer is between 18 and 34

Conversion score by age (% who visit / % aware)

Exhibit 28: …Chipotle core consumer also 18 to 34

Conversion score by age (% who visit / % aware)

Source: Goldman Sachs Brand Survey of 2,000 consumers


Taco Bell and Chipotle share the $50-90K income bracket – Both concepts also share

consumers with household incomes in between $50,000 and $90,000 (see Exhibits 29 and

30). Chipotle skews towards higher income consumers and Taco Bell towards lower end,

but approximately 30% of Americans fall within this middle band. All-in, we believe this is

25%

26%

27%

28%

29%

30%2003

2004

2005

2006

2007

2008

2009

2010

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

2014E

Sal

es (

$m

n)

Taco Bell

Chipotle

30%

40%

50%

60%

70%

80%

18-24 25-34 35-44 45-54 55-64 65+ 0%

10%

20%

30%

40%

50%

60%

70%

18-24 25-34 35-44 45-54 55-64 65+



reason enough to be concerned that the rapid growth of Chipotle will have an adverse

impact on Taco Bell’s results.

Exhibit 29: Taco Bell skews to low-mid incomes

Conversion score by income (% who visit / % aware)

Exhibit 30: …while Chipotle attracts mid-high incomes

Conversion score by income (% who visit / % aware)



KFC caught in a negative feedback loop

SSS declines and market share losses fueling negative feedback loop – KFC has been

the most challenged YUM’s US brands. SSS have averaged -1% since 2000, and have

underperformed its QSR peers in 9 of the past 11 years and 12 of the last 13 quarters (see

Exhibits 31 and 32). KFC is caught in a negative feedback loop, in our view, and might be

nearing a critical tipping point. In this section we outline what we believe is the

underlying issues causing and perpetuating this cycle:

(1) Out-dated restaurants and perceived unhealthiness of the food resulting in

market share losses

(2) Cuts in advertising support

(3) Franchisees closing restaurants

50%

55%

60%

65%

70%

75%

<$30k $30-50k $50-70k $70-90k $90-120k $120+

20%

30%

40%

50%

60%

<$30k $30-50k $50-70k $70-90k $90-120k $120+



Exhibit 31: KFC SSS have underperformed QSR peers in 9

of the prior 11 years KFC SSS vs. US QSR SSS index, annually

Exhibit 32: KFC SSS have been flat/negative in 12 of last

13 quarters and have underperformed QSR peers KFC SSS vs. US QSR SSS index, quarterly



(1) Brand Equity issues leading to market share losses

KFC is losing significant market share –Since 2000, KFC’s share of chicken has eroded

from 37% to 28% while both Chic-fil-A and Buffalo Wild Wings doubled their respective

market shares (see Exhibit 33). In 2010, the combined market share of Chic-fil-A and

Buffalo Wild Wings was greater than KFC, the first time that the #2 and #3 in the market

held higher share than KFC.

Overall chicken QSR is also losing share – Compounding KFC’s company-specific share

loss has been the relative share declines of the chicken category within total QSR. Since

2000, cumulative sales growth of the chicken QSR category grew 34%, trailing the broad

QSR industry’s 46% growth (see Exhibit 34). We do not believe this implies less chicken

being consumed, rather companies with a broader menu (such as MCD and PNRA) are

taking share from chicken-specific concepts.

Exhibit 33: KFC share within chicken also declining

Market share of chicken QSR by company

Exhibit 34: Chicken QSR is losing ground

Cumulative sales growth of chicken QSR vs. total QSR



-6%

-4%

-2%

0%

2%

4%

6%

8%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

KFC US

US QSR index

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

KFC

US QSR Index

0%

10%

20%

30%

40%

50%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

KFC

Chick-fil-A

Buffalo Wild Wings

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Cu

mu

lati

ve s

ale

s g

row

th

Chicken QSR

Total QSR



Brand issues are hampering KFC’s results – Our research suggests KFC lacks appeal to

those consumers looking for a healthy dining option as the perceived healthiness of KFC

ranks in the bottom quartile of QSR/Fast Casual chains. Chic-fil-A and Buffalo Wild Wings,

meanwhile, score in the top half (see Exhibit 35). We point out that low perceived

healthiness does not necessarily portend poor results, as McDonalds proves, but it is

noteworthy that the bottom scoring 5 concepts had an average 2010 SSS of 0% vs. overall

QSR of +2%.

KFC units are outdated – KFC also scores near the bottom of its peer group in terms of

the modern look and feel of its physical locations while Chic-fil-A and Buffalo Wild Wings

both score in the top third (see Exhibit 36). New entrants such as Chic-Fil-A, Chipotle and

Panera are expanding with modern units while legacy competitors such as McDonalds are

aggressively remodeling their existing base, leaving KFC behind with its older asset base.

Exhibit 35: KFC not seen as a healthy dining-out choice

Healthiness of food score

Exhibit 36: KFC restaurants not seen as modern

Modern look and feel score



KFC and Chic-fil-A compete head-to-head in core markets – KFC and Chic-fil-A both

achieve their highest brand equity scores in the Midwest, Southeast and Southwest

regions (see Exhibit 37). Chic-fil-A has better brand equity in each of these markets,

however, indicating that KFC’s core consumer is under attack by a preferred competitor

(see Exhibit 38). Meanwhile, BWLD has a much smaller footprint but also scores

consistently above KFC in all regions.

40

50

60

70

80

90

Su

bw

ay

Pan

era

Ch

ipo

tle

Qd

ob

a

Pei W

ei

Qu

izn

os

Tim

Ho

rto

n's

Ch

ic-F

il-A

Sta

rbu

cks

Arb

y's

Bu

ffalo

Wil

d W

ing

s

Wen

dy's

Pap

a J

oh

n's

Piz

za H

ut

Taco

Bell

Jack in

th

e B

ox

KFC

Do

min

o's

So

nic

Bu

rger

Kin

g

McD

on

ald

s

Hea

lth

of

foo

d s

core

60

65

70

75

80

85

90

95

Pan

era

Sta

rbu

cks

Pei W

ei

Ch

ipo

tle

Ch

ic-F

il-A

Bu

ffalo

Wil

d W

ing

s

Tim

Ho

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n's

Qd

ob

a

Qu

izn

os

Su

bw

ay

Arb

y's

Jack in

th

e B

ox

Taco

Bell

So

nic

Pap

a J

oh

n's

Wen

dy's

McD

on

ald

s

KFC

Bu

rger

Kin

g

Piz

za H

ut

Do

min

o's

Mo

dern

loo

k &

feel

sco

re



Exhibit 37: KFC brand equity trails BWLD and Chic-fil-A

KFC vs. BWLD vs. Chic-Fil-A brand equity

Exhibit 38: Chic-fil-A is preferred competitor in KFC’s core

markets Regional brand equity, KFC vs. Chic-fil-A



(2) KFC advertising support levels are declining

Market share losses mirror share of voice declines – Our analysis shows that KFC’s

market share losses have moved in lock-step with its declining share of chicken

advertising spend (see Exhibit 39). This is typical of the negative feedback loop that can

occur in restaurants as declining sales lead to lower advertising budgets, which then lead

to further sales declines.

Exhibit 39: KFC’s market share losses have coincided with lower relative ad support

Share of advertising spend vs. $ market share (chicken)

Source: Kantar, Euromonitor

0

10

20

30

40

50

60

70

80

90

100

Co

nvers

ion

Bu

zz

Facto

r

Wil

lin

gn

ess to

Pay

Mo

dern

lo

ok &

feel

Fo

od

Qu

ali

ty

Bra

nd

Eq

uit

y

KFC

BWLD

Chic-Fil-A

35

40

45

50

55

60

65

70

75

80

Northeast Northwest Midwest Southeast Southwest

KFC

Chic-Fil-A

25%

27%

29%

31%

33%

35%

37%

50%

60%

70%

80%

90%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Chi

cken

cat

egor

y $

shar

e

Shar

e of

chi

cken

ad

spen

ding Share of voice

Mkt share



In absolutes, ad spending is back to the 2000 level – KFC ad spending in 2010 was 22%

lower 2007, and has returned to 2000 levels (see Exhibit 40). Meanwhile, KFC’s

competitors continue dedicating an increasing amount of ad support. Since 2007, Chic-fil-

A, Buffalo Wild Wings and Popeyes have increased ad spend by 55%, 94%, and 88%,

respectively.

Exhibit 40: KFC ad spend back to 2000-2001 levels Dollar value of ad impressions, $ millions

Source: Kantar, Goldman Sachs Research

(3) Franchisees are closing restaurants

Over 20% of franchisees in 2003 have since closed their restaurants – As weak results

compound on weak results, the unit economics for franchisees become less attractive.

Eventually, it is no longer profitable to operate restaurants and franchisees begin

converting their units for other uses. We have seen this trend occurring with KFC - since

2003, more than 20% of franchise units have been closed, a more severe pace than what

we have seen with Arby’s, a chain that recently experienced a similar problem (see

Exhibit 41).

Exhibit 41: Cumulative franchisee KFC closings are worse than Arby’s

Gross franchise closings from 2003 to present


150

175

200

225

250

275

300

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0%

5%

10%

15%

20%

25%

2003 2004 2005 2006 2007 2008 2009 2010

KFC

Arby's



Pizza Hut has been flat or down in 10 of the last 18 years

Pizza Hut results have been similarly mediocre – Pizza Hut SSS have been flat or

negative in 10 of 18 years (see Exhibit 42). Overall SSS have averaged +1% over the

period, insufficient to maintain margins in the face of labor and food inflation with CPI up

2-3%/year. NPC International, the largest Pizza Hut franchisee with 1,100 units, which we

view as a proxy, has seen its restaurant margins decline from 17.8% in 1999 to 12.4% in

2010 (see Exhibit 43).

Exhibit 42: Pizza Hut SSS have been down more than upPizza Hut US SSS, 1994-2011YTD

Exhibit 43: Unit economics are suffering NPC Int’l reported restaurant level margins



Challenging industry dynamic partially to blame – We believe a primary issue that

Pizza Hut faces is that the US pizza industry has been a long-term underperformer. Pizza

industry SSS (DPZ, PH and PZZA) have underperformed broader QSR in 10 of 11 years

since 2000 (see Exhibit 44). Industry results have been strong of late, but it is unclear if

anything structural has changed.

No pizza chain has achieved consistent results – Within this underperforming industry,

we believe the top players are simply trading customers year to year based on

promotional activity. Ranking the three major players in terms of SSS in each of the past

11 years, DPZ has finished at the top 5 years, Pizza Hut in 3 years and Papa John’s in 3

years (see Exhibit 45).

Pizza HutUS SSS

1994 -6%1995 4%1996 -4%1997 -1%1998 6%1999 9%2000 1%2001 0%2002 0%2003 -1%2004 5%2005 0%2006 -3%2007 1%2008 2%2009 -9%2010 8%

2011 YTD -3%

5%

8%

11%

14%

17%

20%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010



Exhibit 44: Pizza industry a consistent underperformer

Pizza industry (DPZ, PH, PZZA) SSS vs. total QSR

Exhibit 45: Major pizza chains rotating at top spot

DPZ, PZZA and PH ranked by annual SSS, best to worst



Pizza Hut share of voice to decade lows – Pizza Hut SSS were down 2-3% in each of the

last few quarters, and we see risk to future performance due to recent declines in

advertising share of voice. Dominos and Papa John’s have significantly increased

spending of late, driving a gap between theirs and Pizza Hut’s spending levels (see Exhibit

46). Pizza Hut’s ad spend in absolutes is up 33% since 2000 but its share of voice has

reached decade-lows (see Exhibit 47). It appears it is becoming more expensive to

compete in this hyper-competitive industry.

Exhibit 46: Domino’s and Papa John’s have ramped ad

spending in the last two years Ad spend $ millions of Pizza Hut vs. DPZ+PZZA

Exhibit 47: Share of voice at decade lows as a result of

increased competition ad spend Pizza Hut share of ad spending



-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Sam

e-s

tore

sale

s

Pizza

Total QSR

Pizza Industry SSS Best Mid Worst

2000 PZZA PH DPZ2001 DPZ PH PZZA2002 DPZ PH PZZA2003 DPZ PH PZZA2004 PH DPZ PZZA2005 PZZA DPZ PH2006 PZZA PH DPZ2007 PH PZZA DPZ2008 PH PZZA DPZ2009 DPZ PZZA PH2010 DPZ PH PZZA

100

150

200

250

300

350

4Q

00

2Q

01

4Q

01

2Q

02

4Q

02

2Q

03

4Q

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2Q

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4Q

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2Q

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4Q

05

2Q

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4Q

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07

2Q

08

4Q

08

2Q

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4Q

09

2Q

10

4Q

10

Ad

sp

end

$m

n

Pizza Hut

DPZ + PZZA

6%

7%

8%

9%

10%

4Q

00

2Q

01

4Q

01

2Q

02

4Q

02

2Q

03

4Q

03

2Q

04

4Q

04

2Q

05

4Q

05

2Q

06

4Q

06

2Q

07

4Q

07

2Q

08

4Q

08

2Q

09

4Q

09

2Q

10

4Q

10



A key risk: China income tax cuts

China is cutting income tax rates this September –The Chinese government is

initiating a tax cut effective on September 1, 2011. The income threshold for households

to be exempt from income taxes will be raised, middle income earners will receive a 3-6%

tax cut, while high income earners will see taxes rise 1% (see Exhibit 48). It is unclear

what the impact of this tax cut will be on YUM’s China SSS, but an increase in

discretionary cash flow may lead to higher middle class spending across the board.

Exhibit 48: China tax cut will benefit those earnings less than Rmb 40,000/month Comparison of personal income tax under current and new tax regime

Source: Goldman Sachs

Chinese discretionary spending could increase 18-27% for core middle class –

Goldman Sachs China Retail team estimates that the tax cut could translate into a 18-27%

boost in discretionary spending power (see Exhibit 49).

Exhibit 49: Middle class discretionary spending could rise 18-27% for middle class Comparison of income available for discretionary spending under current and new tax regime

Source: Goldman Sachs

A boost in spending may override prior relationships – We have found a strong

relationship between YUM’s China SSS and nominal GDP in the country, and have

forecasted a moderation of YUM’s China SSS as a result (see Exhibit 50). However, the

impending tax cut may interfere with that historical relationship. If so, our China SSS

estimates, and thus YUM EPS forecasts, could potentially be too low.

Pre-tax income Under current Under new Increase/ As % of 2,585 2,320

2,000 0 0 0 0.0%3,000 75 - (75) (2.5%)4,000 175 15 (160) (4.0%)5,000 325 45 (280) (5.6%)6,000 475 145 (330) (5.5%)7,000 625 245 (380) (5.4%)8,000 825 345 (480) (6.0%)9,000 1,025 545 (480) (5.3%)10,000 1,225 745 (480) (4.8%)20,000 3,225 3,120 (105) (0.5%)30,000 5,625 5,620 (5) (0.0%)38,000 7,625 7,620 (5) (0.0%)40,000 8,125 8,195 70 0.2%50,000 11,025 11,195 170 0.3%60,000 14,025 14,270 245 0.4%70,000 17,425 17,770 345 0.5%80,000 20,925 21,270 345 0.4%90,000 24,825 25,420 595 0.7%

100,000 28,825 29,920 1,095 1.1%110,000 33,225 34,420 1,195 1.1%120,000 37,725 38,920 1,195 1.0%130,000 42,225 43,420 1,195 0.9%

5,000-10,000 income

group can save over

5-6% of pre-tax

income.

People earning over

Rmb 40,000 per

month will have to

pay higher tax.

% increasePre-tax income

(a)

Tax

(b)

Total spending on necessities

(c)

Income available for discretionaries(d) = (a) - (b) - (c)

Pre-tax income

(a)

Tax

(b)

Total spending on necessities

(c)

Income available for discretionaries

(d) = (a) - (b) - (c)

in discretionary spending power

3,000 75 2,455 470 3,000 0 2,455 545 16%5,000 325 3,640 1,035 5,000 45 3,640 1,315 27%7,500 725 4,980 1,795 7,500 295 4,980 2,225 24%10,000 1,225 6,135 2,640 10,000 745 6,135 3,120 18%12,500 1,725 7,035 3,740 12,500 1,245 7,035 4,220 13%15,000 2,225 7,860 4,915 15,000 1,870 7,860 5,270 7%

Current tax regime New tax regime

18-27% increase

in discretionary

spending power

of the core

middle class



Exhibit 50: We are currently forecasting YUM China SSS to moderate with GDP YUM China SSS vs. China nominal GDP

Source: Company data, Haver Analytics, Goldman Sachs ECS Research

Financial Advisory Disclosure

Goldman Sachs is acting as financial advisor to Yum! Brands, Inc. in an announced

strategic transaction.

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11E

4Q11E

China SSS

China Nominal GDP



Reg AC

We, Michael Kelter and Chris Cerrone, hereby certify that all of the views expressed in this report accurately reflect our personal views about the

subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly,

related to the specific recommendations or views expressed in this report.

Investment Profile

The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and

market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites

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of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend

yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.

Quantum

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Disclosure Appendix

Coverage group(s) of stocks by primary analyst(s)

Michael Kelter: America-Restaurants, America-Toys.

America-Restaurants: Chipotle Mexican Grill, Inc., McDonald's Corp., Panera Bread Co., Starbucks Corp., The Wendy's Company, Tim Hortons Inc.,

Tim Hortons Inc., Yum! Brands, Inc..

America-Toys: Hasbro, Inc., Mattel, Inc..

Company-specific regulatory disclosures

The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies

covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.

Goldman Sachs has received compensation for investment banking services in the past 12 months: Yum! Brands, Inc. ($52.66)

Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Yum! Brands, Inc.

($52.66)

Goldman Sachs has received compensation for non-investment banking services during the past 12 months: Yum! Brands, Inc. ($52.66)

Goldman Sachs had an investment banking services client relationship during the past 12 months with: Yum! Brands, Inc. ($52.66)

Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: Yum! Brands, Inc.

($52.66)

Goldman Sachs had a non-securities services client relationship during the past 12 months with: Yum! Brands, Inc. ($52.66)

Goldman Sachs has managed or co-managed a public or Rule 144A offering in the past 12 months: Yum! Brands, Inc. ($52.66)

Goldman Sachs makes a market in the securities or derivatives thereof: Yum! Brands, Inc. ($52.66)

Goldman Sachs holds a position greater than U.S. $15 million (or equivalent) in the debt or debt instruments of: Yum! Brands, Inc. ($52.66)



Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe

Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 32% 54% 14% 52% 41% 37%

As of July 1, 2011, Goldman Sachs Global Investment Research had investment ratings on 3,167 equity securities. Goldman Sachs assigns stocks as

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the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

Price target and rating history chart(s)

Regulatory disclosures

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See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager

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Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets

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Conflicts of Interest in Connection with Investment Research.

Yum! Brands, Inc. (YUM)

5958

48

43

42

403632

30

3234

33

35

39

36

38

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30

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45

50

55

60

600

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Goldman Sachs rating and stock price target history

Stock Price Currency : U.S. Dollar

Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 6/30/2011.

The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.

Rating

Price target

Price target at removal

Covered by Michael Kelter,as of Dec 15, 2010

Not covered by current analyst

S&P 500

Inde

x P

rice

Sto

ck P

rice Jun 30 May 3 Dec 15

N B CSA

NS O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J2008 2009 2010 2011



Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer under the Financial Instrument and Exchange Law, registered with the

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Return potential represents the price differential between the current share price and the price target expected during the time horizon associated

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Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in

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Documents

Lowering estimates further after developed market deep dive › sites › default › files › YUM US deep... · growth. We lower our 2011/2012/2013 estimates to $2.80/$3.15/$3/60