YUM Yum Brands Inc

By Julie Jargon 

Yum Brands Inc. plans to become a leaner company that operates fewer of its own restaurants after it spins off its volatile China business next month.

The parent of KFC, Pizza Hut and Taco Bell said on Tuesday that it plans to increase the percentage of restaurants owned by franchisees to at least 98% by the end of fiscal 2018, up from 77% currently. The China spinoff alone will boost that figure to 93% because the China business, which accounts for more than half of Yum's revenue, will license the brands, paying Yum an annual royalty fee.

Many restaurant brands have been moving to an "asset light" structure in which they own the brands but not the actual restaurants. The model allows restaurant companies to shoulder less risk and volatility because they can collect a stable revenue stream in the form of a percentage of franchisees' sales. McDonald's Corp., Restaurant Brands International Inc.'s Burger King, Wendy's Co. and other major chains have been selling more of their company-owned restaurants to franchisees.

"As a 'pure play' franchisor, the transformed Yum Brands will become more efficient and capital-light with an optimized capital structure, improved cash flow and laser-like focus on our key strategies to drive same-store sales and new unit growth world-wide," Chief Executive Greg Creed said in a statement.

The company also announced plans to reduce its annual capital expenditures to approximately $100 million by the end of fiscal 2019 from $500 million, and to reduce its general and administrative expenses by approximately $300 million by the end of fiscal 2019.

Yum last month struck a deal to sell part of its China operations to a prominent Chinese deal maker and the financial affiliate of Chinese internet giant Alibaba Group Holding Ltd. Primavera Capital, run by former Goldman Sachs Group Inc. Greater China Chairman Fred Hu, and Ant Financial Services Group will buy a combined $460 million stake in the Yum China Holdings Inc. spinoff. The China business will begin trading separately on the New York Stock Exchange on Nov 1.

Louisville, Ky.-based Yum built KFC into China's most popular fast-food chain since it entered the country in 1987. The company in recent years has faced increasing competition from foreign and local fast-food rivals in China as well as numerous food-safety scares, which resulted in volatile sales. With the China business separated, Yum can now concentrate on improving the sales of its brands in the U.S. and other markets.

In its third quarter, systemwide sales at KFC rose 7%. Taco Bell reported a 5% increase and system sales at Pizza Hut were flat. Yum executives at an investor conference on Tuesday plan to outline their plans for boosting sales at all of their brands following the China spinoff.

Write to Julie Jargon at julie.jargon@wsj.com

(END) Dow Jones Newswires

October 11, 2016 07:45 ET (11:45 GMT)

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