Yum China Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Quarter ended March 31, 2022; comparisons are with Q1 2021 unless noted. Amounts are in U.S. dollars. Yum China operates more than 12,000 restaurants, principally KFC and Pizza Hut, in China.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $2,668 million | $2,557 million |
| Operating profit | $191 million | $342 million |
| Net income attributable to Yum China | $100 million | $230 million |
| Diluted EPS | $0.23 | $0.53 |
| Operating cash flow | $171 million | $331 million |
| Capital spending | $205 million | $165 million |
- Total revenue rose 4% reported (2% excluding foreign-exchange effects). Company restaurant sales increased 9% reported (7% excluding FX) to $2,548 million.
- Restaurant profit fell 20% to $351 million; restaurant margin contracted 4.9 percentage points to 13.8%.
- System sales declined 4% excluding FX; same-store sales declined 8%. KFC same-store sales fell 9% and Pizza Hut’s fell 5%.
- KFC operating profit decreased 33% to $220 million; Pizza Hut operating profit declined 50% to $30 million. All Other Segments reported a $17 million operating loss.
- Investment loss was $37 million, primarily reflecting a $38 million fair-value loss on Meituan shares. The effective tax rate increased to 33.1% from 29.6%.
Liquidity, balance sheet and capital allocation
- At March 31, 2022, cash and cash equivalents were $1,047 million and short-term investments were $2,622 million. Current assets were $4,266 million and current liabilities were $2,085 million.
- No bank borrowings were outstanding. Credit facilities totaled approximately $547 million; $28 million of capacity was used for bank guarantees. Lease liabilities totaled $2,756 million, including $2,711 million operating lease liabilities.
- Cash, cash equivalents and restricted cash decreased by $89 million during the quarter. Investing activities provided $13 million; financing activities used $274 million, including $224 million of share repurchases and $51 million of dividends paid to common stockholders.
- The company repurchased 5.0 million shares for $232 million and had $1,385 million remaining under its $2.4 billion authorization. A further $0.12-per-share dividend was declared after quarter-end.
Material changes, outlook and risks
- COVID-19 disruption: The Omicron outbreak intensified in March. More than 1,700 stores, on average, were temporarily closed or limited to takeaway and delivery; March same-store sales declined more than 20%, and the company incurred an operating loss that month.
- Management said conditions worsened in Q2: in April, more than 3,000 stores, on average, were temporarily closed or limited to takeaway and delivery, with approximately half temporarily closed. April same-store sales declined more than 20%. Unless conditions improved significantly in May and June, management expected an operating loss in Q2. The filing provides no full-year earnings guidance.
- Management attributed the profit decline to lower same-store sales, temporary closures, wage inflation (5% overall), higher delivery rider costs and commodity inflation. Restaurant sales mix shifted toward delivery amid outbreaks.
- Reported restaurant count was 12,117, up 13% year over year. The increase in company-owned units includes Hangzhou KFC, consolidated after the 2021 transaction; the shift from unconsolidated affiliate to company-owned also reduced franchise-related revenue.
- On April 15, 2022, Yum China amended Taco Bell development milestones: at least 100 stores by end-2022 and 225 by end-2025, subject to investment support and achievement of milestones, for a potential 50-year exclusive China license.
- Contingencies: A Chinese transfer-pricing audit covering 2006–2015 remains unresolved; the potential exposure cannot currently be estimated, and an adverse determination could materially affect results, cash flows and financial position. A separate potential Chinese indirect-transfer tax relating to the 2016 separation could also be significant.
- Other key risks: The filing identifies uncertainty around COVID-19 restrictions and recovery, RMB exchange-rate exposure, and the risk of U.S. trading prohibition/delisting if PCAOB inspection requirements are not met. Yum China was identified by the SEC as a Commission-Identified Issuer in March 2022; the filing warned of possible delisting in early 2024, or early 2023 if proposed legislative changes took effect.
Most important facts for investors to verify
- Whether store restrictions and same-store sales improved after April, and how closures affected Q2 operating results and cash generation.
- The status and potential financial exposure of the Chinese transfer-pricing audit and any indirect-transfer tax claims.
- Progress toward Taco Bell’s development milestones and the economics of expansion.
- Changes in Meituan’s share price and resulting investment gains or losses; the investment’s market value was $84 million at quarter-end.
- Progress toward PCAOB audit inspection access and any developments affecting Yum China’s U.S. listing.