Yum! Brands, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless noted. Amounts are in millions of U.S. dollars except per-share data and percentages. Yum! franchises or operates more than 57,000 restaurants across over 155 countries and territories; 98% were franchise-operated at quarter-end. The filing’s interim financial statements were reviewed by KPMG, not audited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Year to date 2023 | Year to date 2022 |
|---|---|---|---|---|
| Total revenue | $1,708 | $1,640 | $5,040 | $4,823 |
| Operating profit | $613 | $546 | $1,709 | $1,609 |
| Net income | $416 | $331 | $1,134 | $954 |
| Diluted EPS | $1.46 | $1.14 | $3.97 | $3.28 |
| Operating margin | 35.9% | 33.3% | 33.9% | 33.4% |
| Effective tax rate | 17.7% | 25.8% | 16.3% | 22.7% |
Revenue increased 4% in Q3 and 5% year to date. Q3 operating profit rose 12%, net income 26% and diluted EPS 27%; year-to-date increases were 6%, 19% and 21%, respectively. Lower tax rates contributed to earnings growth. Management’s non-GAAP diluted EPS excluding special items was $1.44 for Q3 (up 32%) and $3.91 year to date (up 22%).
System sales excluding foreign exchange increased 10% in Q3 and 11% year to date; same-store sales grew 6% and 7%, respectively. At quarter-end, the system had 57,274 units, up 6% year over year. Q3 same-store sales were strongest at Taco Bell (8%) and KFC (6%); Pizza Hut grew 1%, while Habit Burger Grill declined 5%.
Company restaurant profit was $89 in Q3 versus $77, with margin improving to 17.3% from 16.2%. Year-to-date profit was $256 versus $229, and margin was 17.1% versus 15.8%. Management cited sales growth as supportive, with commodity inflation and labor costs among the offsets.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was $1,155, up from $975. Capital spending was $179. Investing cash outflow was $4, including $121 of proceeds from the KFC Russia sale and $57 from refranchising.
- Financing cash outflow was $921, including $508 of common dividends, $50 of share repurchases and $60 of long-term debt repayments. Cash, cash equivalents and restricted cash totaled $875 at September 30; balance-sheet cash and equivalents were $656.
- Total debt, excluding finance leases and issuance costs, was approximately $11.6 billion; long-term debt on the balance sheet was $11,152 and short-term borrowings were $373. About 94% of debt was fixed-rate, including swaps, at an effective overall rate of approximately 4.6%. Consolidated net leverage was 4.4x EBITDA.
- The $1.25 billion revolving facility was undrawn. Management said operating cash flow, approximately $650 million of cash on hand, and available revolver capacity should cover cash requirements for the next 12 months. The company reported a shareholders’ deficit of $8,190.
Material changes, outlook and notable items
- Segment results: Q3 operating profit rose at KFC to $344 from $304, Taco Bell to $226 from $204, and Pizza Hut to $97 from $92; Habit Burger Grill’s operating loss narrowed to $2 from $4. Taco Bell delivered the strongest Q3 same-store sales growth. Habit’s same-store sales fell 5%.
- Russia exit: Yum completed the KFC Russia sale in April 2023 for $121 in cash proceeds and recorded a $3 year-to-date charge from the sale. Russia-related operating results and foreign-exchange effects are presented in unallocated amounts and treated as special items in management’s non-GAAP measures.
- Foreign exchange: Currency translation reduced divisional operating profit by $5 in Q3 and $49 year to date. Management expected a full-year negative impact of approximately $45–$55 million.
- Tax and investment items: The lower year-to-date tax rate included an $18 benefit from favorable resolution of a foreign tax audit and a $10 benefit from additional foreign net operating loss deferred tax assets. The prior-year comparison included an $82 foreign tax credit benefit and $69 of net tax expense related to the Russia exit. Fair-value gains on Yum’s approximately 5% Devyani investment were $16 in Q3 and $21 year to date in 2023.
- Management outlook: Yum expected 2023 operating cash flow to exceed $1.3 billion, consistent with the level achieved in each of the prior four years. The filing does not provide a specific full-year revenue or EPS forecast. Management intends to invest in growth, pay a competitive dividend and use remaining excess cash for share repurchases.
- Capital returns: The company declared $0.605 per share in Q3 dividends. No shares were repurchased during the quarter; $1.7 billion remained available under the authorization through June 30, 2024.
Risks and contingencies
- IRS dispute: The IRS proposed $2.1 billion of tax plus $418 million of penalties for fiscal 2014, with estimated interest of approximately $940 million through Q3 2023. Yum disputes the position, is pursuing IRS appeals, believes its tax position is more likely than not to be sustained, and recorded no reserve. An unfavorable outcome could materially affect future financial statements; resolution is not expected within 12 months.
- India regulatory matter: An Indian enforcement order imposed a penalty of approximately $135 million on a subsidiary and former directors. The penalty remains stayed while proceedings continue. Yum denies liability and does not consider a significant loss probable.
- Lease guarantees: Potential undiscounted payments were approximately $375 million, or $300 million on a present-value basis. Recorded expected losses were not material; franchisees are primary lessees under most guarantees.
- Ransomware incident: The January 2023 attack temporarily closed fewer than 300 restaurants in one market for one day. Yum said affected data included certain current and former employee personal information, with no evidence customer databases were accessed. Employee class actions and response costs remain; management did not expect a material adverse effect.
- Management reported no material changes to the company’s previously disclosed risk factors or market-risk disclosures. Disclosure controls were deemed effective at quarter-end.
Important facts for investors to verify
- Progress and potential financial exposure from the IRS dispute, including the proposed tax, penalties and accumulating interest.
- Whether sales growth, restaurant margins and unit expansion continue, particularly at Habit Burger Grill and Pizza Hut.
- Actual foreign-exchange effects versus management’s estimated $45–$55 million full-year divisional operating-profit impact.
- Debt maturities, interest costs and leverage alongside dividends, investment spending and any future share repurchases.
- Further developments in the India regulatory proceedings, lease guarantees and ransomware-related litigation or costs.