Pizza Hut 2011 Annual Report Download - page 114

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Our operating results are closely tied to the success of our Concepts’ franchisees.
A significant portion of our revenue consists of royalties from our franchisees. Because a significant and growing portion of our
restaurants are run by franchisees, the success of our business is increasingly dependent upon the operational and financial success
of our franchisees. While our franchise agreements set forth certain operational standards and guidelines, we have limited control
over how our franchisees’ businesses are run, and any significant inability of our franchisees to operate successfully could adversely
affect our operating results through decreased royalty payments. For example, franchisees may not have access to the financial
or management resources that they need to open or continue operating the restaurants contemplated by their franchise agreements
with us.
If our franchisees incur too much debt or if economic or sales trends deteriorate such that they are unable to repay existing debt,
it could result in financial distress, including insolvency or bankruptcy. If a significant number of our franchisees become
financially distressed, our operating results could be impacted through reduced or delayed royalty payments or increased rent
obligations for leased properties on which we are contingently liable.
Our results and financial condition could be affected by the success of our refranchising program.
We are in the process of refranchising restaurants in the U.S., which could reduce the percentage of Company ownership of KFCs,
Pizza Huts, and Taco Bells in the U.S. from approximately 13% at the end of 2011 to approximately 8%. Our ability to execute
this plan will depend on, among other things, whether we receive fair offers for these restaurants, whether we can find suitable
buyers and how quickly we can consummate the sales. In addition, financing for restaurant purchases can be expensive or difficult
to obtain. If buyers cannot obtain financing at attractive prices – or if they are unable to obtain financing at any price – our
refranchising program could be delayed.
Once executed, the success of the refranchising program will depend on, among other things, buyers effectively operating these
restaurants, the impact of contingent liabilities incurred in connection with refranchising, and whether the resulting ownership
mix of Company-operated and franchisee-operated restaurants allows us to meet our financial objectives. In addition, refranchising
activity could vary significantly from quarter-to-quarter and year-to-year and that volatility could impact our reported earnings.
We could be party to litigation that could adversely affect us by increasing our expenses or subjecting us to significant
monetary damages and other remedies.
We are involved in a number of legal proceedings, which include consumer, employment, tort and other litigation. We are currently
a defendant in cases containing class action allegations in which the plaintiffs have brought claims under federal and state wage
and hour and other laws. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, and the
magnitude of the potential loss relating to such lawsuits may not be accurately estimated. Regardless of whether any claims against
us are valid, or whether we are ultimately held liable, such litigation may be expensive to defend and may divert resources away
from our operations and negatively impact reported earnings. With respect to insured claims, a judgment for monetary damages
in excess of any insurance coverage could adversely affect our financial condition or results of operations. Any adverse publicity
resulting from these allegations may also adversely affect our reputation, which in turn could adversely affect our results.
In addition, the restaurant industry has been subject to claims that relate to the nutritional content of food products, as well as
claims that the menus and practices of restaurant chains have led to the obesity of some customers. We may also be subject to
this type of claim in the future and, even if we are not, publicity about these matters (particularly directed at the quick service and
fast-casual segments of the industry) may harm our reputation and adversely affect our results.
Health concerns arising from outbreaks of viruses or other diseases may have an adverse effect on our business.
Asian and European countries have experienced outbreaks of Avian Flu, and some commentators have hypothesized that further
outbreaks could occur and reach pandemic levels. Future outbreaks could adversely affect the price and availability of poultry
and cause customers to eat less chicken. Widespread outbreaks could also affect our ability to attract and retain employees.
Furthermore, other viruses such as H1N1 or “swine flu” may be transmitted through human contact, and the risk of contracting
viruses could cause employees or guests to avoid gathering in public places, which could adversely affect restaurant guest traffic
or the ability to adequately staff restaurants. We could also be adversely affected if jurisdictions in which we have restaurants
impose mandatory closures, seek voluntary closures or impose restrictions on operations of restaurants. Even if such measures
are not implemented and a virus or other disease does not spread significantly, the perceived risk of infection or significant health
risk may affect our business.
Form 10-K