Monday, May 10, 1999

Tricon Global Restaurants Inc.
Phone: 502-874-8200
Website: www.triconrestaurants.com
Price  (5/7/99): $61 1/2


Things are really cooking at Tricon (NYSE: YUM). Pizza Hut is stuffing crusts and shareholder wallets. Taco Bell is getting as big as its signature Chihuahua is small. KFC has rediscovered the Colonel's secret recipe for winning back repeat business.

The popular fast food triad is back with all three chains reporting same-store sales increases in unison for the first time in the 1990s. Just two years ago PepsiCo (NYSE: PEP) spun off the quick service conglomerate. While it gave the company newfound flexibility, it also came attached with a $4.8 billion debt load paperweight and struggling concepts.

Pizza Hut was being pan-handled by delivery specialists Domino's and Papa John's (Nasdaq: PZZA). KFC was being threatened by the new generation of rotisserie chicken eateries like Boston Chicken (Nasdaq: BOSTQ). Taco Bell was holding its own, but with a pair of ailing siblings it was hard to get investors behind Tricon.

The past year has been much kinder. Pizza Hut has fought back with its Stuffed Crust Pizza and now with the wildly popular Big New Yorker traditional style pizza. KFC didn't have to do much but watch as the Kenny Rogers and Boston Chickens of the world did themselves in with nationwide closures as the companies teetered for financial stability. Taco Bell struck out with its Godzilla promotion, but out of the ashes of that marketing campaign came the lovable Chihuahua that inspired a line of add-on toy purchases.

With that, investors have been ringing up their brokers with orders of "Yo Quiero Tricon shares!" Fast bucks on fast food? Apparently so. The company has beaten earnings estimates in each of the past few quarters, and optimism with a side of momentum makes for a great combo meal. With Star Wars merchandise landing at a Tricon near you this month, will the galactic gains continue?


Tricon owns, franchises, or licenses close to 30,000 restaurants worldwide, 20,349 domestically. The chains include Taco Bell, Pizza Hut, and KFC. Only 27.5% of the units are company-owned.

Tricon was spun-off from PepsiCo in October 1997.


Income Statement
12-month sales:  $8359 million 
12-month income:  $497 million
12-month EPS:    $3.15
Profit Margin:    5.9%
Market Cap:    $9901.5 million 

Balance Sheet
Cash:                  $214 million
Current Assets:        $666 million
Current Liabilities:  $1359 million 
Long-term Debt:       $3333 million 

Price-to-earnings: 19.5
Price-to-sales:         1.2


Odds are you are familiar with one, if not all, of the Tricon concepts. Chances again run on the side of you having dined at a Taco Bell, Pizza Hut, or KFC recently. The grass roots perspective of the three chains made this Double easy to find.

Two years ago there was legitimate concern that overbuilding in the quick-service restaurant sector was hurting everyone. At a time when the minimum wage was being hiked -- and the sector clearly depends on young entry-level workers coming in barely above the minimum legal payout -- it was hard not to feel jaded. PepsiCo lumping close to $5 billion in debt into the new company was also a huge burden to carry. Even now, despite having paid off almost a third of that monstrous liability, the company's balance sheet shows negative book value (more liabilities than assets).

But things began to turn around with clever product introductions. KFC began to pick up the pace on new edibles with wraps, bite-sized fried chicken popcorn, and honey barbecue wings making cameo menu appearances. Having other chicken chains buckle under didn't hurt either.

Over at Pizza Hut, inspired buffets and quick-served personal pizzas may have helped those dining in, but the company needed a homerun to compete against the smaller box delivery pizzerias. That savior came earlier this year. Even Donald Trump wondered how Pizza Hut could serve up a 16-inch New York style pizza for $9.99 (and unlike Tricon, Trump still needs to address his long-term debt). With about 50 million New Yorker pies delivered since the item's debut, it has become the most popular new product in Pizza Hut history.

Taco Bell nailed a winner with its flatbread tortilla Gorditas. The chain also had the distinction of making many holiday toy wishlists with its sets of talking Chihuahuas. Folks shelled out $3 a pop for the petite pets that would mutter "Viva Gorditas" and other signature phrases. Now on tap is a move to capture the dinner take-out market with its family-sized $9.99 Grande Meals.

A casual patron could have sensed that things were running well at each of the company's foodservice components. The anticipation of a healthier top line, which for a franchise leader like Tricon is crucial, was a drive-thru Double just waiting to be filled.


The Phantom Menace has arrived and the profits should be anything but phantom. Each of the chains will be decked out in planetary themes to promote the $50 million "Defeat the Dark Side" contest where lucky diners will win prizes like Lincoln Navigators, home theater systems, and even an operational hovercraft. The Tricon bonus here is that to fully participate in the contest one will have to visit restaurants in each of the three chains.

Along with the decor and chance giveaways, the restaurants will be stuffing kid meal bags and boxes with one of 28 Star Wars toy premiums over the next two months. Sturdy collectible lids will also be available as an additional purchase.

With the spectacular summer surge almost a given as kids and kids-at-heart wolf down chicken meal after taco meal to collect as many toys as possible, the $2.66 per share earnings estimate that analysts are projecting this year seems likely to follow suit with last year's projections -- topped, with everything on it. If the promotion wins over new diners, next year's $2.97 a share target might also prove to be too low. For Tricon the future looks like a lot of welcome dark ink.

--Rick Aristotle Munarriz (tmfedible@aol.com)

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