Outlook bright for PepsiCo's 'Big 3;' despite the gloomy economic forecast, industry analysts are predicting a favorable growth in operating profits for Taco Bell, Pizza Hut and KFC

Nation's Restaurant News, Nov 18, 1991 by Robin Lee Allen

Outlook bright for PepsiCo's |Big 3'

Despite the gloomy economic forecast, industry analysts are predicting a favorable growth in operating profits for Taco Bell, Pizza Hut and KFC

PURCHASE, N.Y. -- Despite the recession and increasing competition in the foodservice industry, cash registers at PepsiCo's restaurants continue to ring, although at a less deafening decibel than last year.

Analysts expect the division, which comprises the world's largest restaurant system, to post a 16-percent increase in operating profits, to almost $606 million, compared with a 26-percent jump in 1990. They also project the division's 1991 sales will grow by 15 percent, to $7.2 billion, compared with a 19-percent increase in 1990.

In contrast, analysts expect operating profits at McDonald's Corp. to grow by only 5 percent in 1991 and total revenues to rise by a scant 1 percent.

The biggest financial detriment facing PepsiCo's restaurant division this year, according to stock pickers, is having to compare the sales and profit increases with 1990's stellar gains.

"Last year was so strong at the restaurant chains that it would be unreasonable to see those same gains again," says Joseph J. Doyle, beverage and restaurant analyst at Smith Barney in New York. "It is more that 1990 was abnormally good than that 1991 is disappointing."

"It would be silly to expect any company to produce exceptional years every year," explains Marc Cohen, an investment analyst with Sanford C. Bernstein in New York. "That's not to say that it can't have a very good year. Sixteen percent is a strong gain, especially in this business climate."

For the individual chains, Doyle expects Taco Bell's operating profits to grow 20 percent, to $185 million; Pizza Hut to grow 15 percent, to $306 million; and KFC to grow a modest 5 percent, to $138 million. Each projection excludes onetime charges made during 1991.

Total sales for PepsiCo -- the nation's 23rd-largest corporation, according to Forbes--should reach $19.75 billion in 1991, for an 11-percent increase from 1990 figures, Doyle points out. But operating profits will grow only 9 percent, to $2.4 billion -- a gain far below the 17-percent growth reported in 1990 and the company's average 15-percent growth over the past 10 years.

Price competition will force operating profits at the snack foods division down 1 percent or 2 percent, excluding charges, Bernstein's Cohen says. And the soft-drink division will see gains of 7 percent to 9 percent in its 1991 profits, he notes.

Already, chicken and chip wars have taken their anticipated toll on earnings. PepsiCo recorded hefty charges to both its KFC and Frito-Lay snacks businesses in the third quarter.

KFC took a $9 million charge for the delayed rollout of its Skinfree Crispy product, and Frito-Lay, the country's leading snack-food maker, took a $91.4 million charge to restructure its domestic business in the face of increasing competition.

Combined, the two charges sank the company's third-quarter earnings by 15.2 percent, to $285.4 million, and left year-to-date net income even with last year, at $809.1 million. Excluding the charges, third-quarter profits rose 7 percent and year-to-date net income rose 8 percent.

Third-quarter operating profits for the restaurants increased 7 percent largely on a 13-percent increase in profits at Pizza Hut's domestic businesses.

Taco Bell's third-quarter profits inched upward only 2 percent, leaving many analysts wondering if the value menu had discounted the chain out of a profit margin.

And KFC, excluding the $9 million charge, saw third-quarter profits grow 9 percent.

Worldwide soft-drink sales rose 3 percent, to $1.8 billion, and operating profits went up 6 percent, to $246.8 million. Worldwide snack food revenues increased 10 percent, to $1.3 billion, and operating profits declined 37 percent, to $143.7 million.

Although PepsiCo's restaurants lead their respective segments, they collectively finished third last year in a ranking of the company's businesses by operating profit.

The snack foods division kicked in the largest share -- 42 percent -- with its $934 million in sales.

The soft-drink division contributed 35 percent with its $768 million, and restaurants lagged behind at 23 percent with $522 million.

The soft-drink division, however, led in contributing to PepsiCo's 1990 sales with 37 percent coming from its $6.5 billion. Restaurants kicked in 35 percent with $6.2 billion, and snacks yielded 28 percent with $5 billion.

While those percentages change annually, they remain basically constant by company design, says Elaine Franklin, PepsiCo's manager of corporate information.

Capital investments are made to each division as necessary, and each is expected to contribute its fair share to both sales and profits, Franklin explains.

"Basically, we've kept it about one-third, one-third, one-third," she remarks. "We are trying to have three big businesses, and we grow each to the maximum, keeping in mind that we are in this for the long term. It's a very deliberate and strategic position so that all three are big and able to grow."