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Hey Petronilo,

Total sales for Fiscal Year 2000 are expected to be $7.4 billion and from there they should grow about 10% per year.

Company sales for FY99 clocked in at $7.1 billion, down from $7.9 billion in FY98, an 8% decrease because of reduced system ownership, which now stands at 23.3%. Total system sales in FY99 grew 6% to $21.8 billion. YUM plans to sell about another 1000 stores in FY00 to reach its stated target of 20% company ownership. That will reduce its current ownership by 14%.

For YUM to hit $7.4 billion in sales in 2000, it will have to grow sales at its stores 4.2%, at a time when it is divesting itself of 14% of its outlets. That means something like 12% sales growth (that's a rough estimate, of course, since the speed of divestiture is not known), or double the growth of system sales in FY99.

That's asking quite a bit from stores that had SSS growth of 9% (Pizza Hut), 2% (KFC) and 0% (Taco Bell) last year. Also, asking for year-over-year growth of 10% from these stores seems fairly optimistic to me, for a company where systemwide sales hadn't grown more than 1% in any of the three years prior to 1999.

Yesterday's revenue growth, the company's free cash flow and debt reduction over the last two years have all been driven largely by divestiture. Not that it isn't good--it was probably the only way to avoid insolvency. The company is committed to climbing out from under its blanket of debt, and it's paying off in many ways. Yesterday's annual earnings were $0.31 better (reckoning 35% tax rate) because of the $70 million lower interest payments. That's very positive.

Still, I think that the company has a long way to go. They have to find some way to generate earnings other than shrinking their revenue source. They are reducing total costs, but in the long run they will need a good, growing revenue source. What will it be?

Fool on!
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