The Associated Press reported yesterday that YUM will be eliminating several hundred jobs and shifting up to a couple hundred more as a part of its U.S. restructuring plans. Company spokesman Jonathan Blum provided details, saying that several hundred jobs will be eliminated at YUM’s Louisville operations as well as at Taco Bell's headquarters in Irvine, CA, at Pizza Hut's headquarters in Dallas and in field operations nationwide. In addition, an unspecified number of cuts will be achieved by not filling open positions. Also, up to a couple hundred more positions will be shifted from YUM's corporate headquarters in Louisville to the company's brands. "We believe this will enable us to operate more effectively and improve our cost structure," Blum said.
YUM’s U.S. business has been significantly underperforming the company’s China and International segments and in each of the last two quarters posted operating margins that were down in the 200 basis point range YOY. YUM’s U.S. blended same-store sales growth finally turned positive in 2008 after six quarters of declines, but operating margins have not yet reflected this improvement. Management has attributed this profit underperformance to significantly higher commodity costs and continued weakness at its KFC brand, which posted a 4% decline in comparable sales in the most recent quarter. The company continues to maintain that it will be able to turnaround KFC in 2009 and generate profit growth, but this relies largely on the success of its 2Q national launch of Kentucky Grilled Chicken.
Additionally, management outlined on its 3Q08 earnings call an aggressive U.S. cost reduction initiative to help yield improved profitability in 2009. At the same time, YUM is proceeding with its refranchising plans and is still targeting U.S. company ownership of below 10% by the end of 2010, which would also improve U.S. margins. Management has commented, however, that although still on plan, current credit conditions have slowed down the timing of these refranchising transactions. The company expects its cost saving efforts net of the operating profit foregone from refranchising to boost FY09 U.S. operating profits by about $30 million.
Yesterday’s announcement signals that YUM is proceeding with its U.S. cost reduction plans, which is a welcomed sign because the U.S. still accounts for about 40% of the company’s expected 2008 total operating profit. Outside of these expected cost savings, however, a return to U.S. profitability still relies on several questionable factors: improved commodity costs; profitable same-store sales growth (difficult in today’s highly promotional environment); the success of Kentucky Grilled Chicken and a turnaround at KFC; and the credit market’s impact on YUM’s refranchising efforts.