Business context and reporting period
Yum China Holdings, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2021, with comparison to the quarter ended March 31, 2020. The company operates, franchises, or invests in restaurant brands in China, principally KFC and Pizza Hut. It operated 10,725 restaurants at quarter-end, up 15% year over year. The 2020 comparison was significantly affected by COVID-19.
Financial and operating performance
| Metric (US$ millions, except per-share data and percentages) | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $2,557 | $1,754 | +46% reported; +36% excluding foreign exchange |
| Operating profit | $342 | $97 | +250% reported; +227% excluding foreign exchange |
| Net income attributable to Yum China | $230 | $62 | +272% reported |
| Diluted EPS | $0.53 | $0.16 | +231% reported |
| Adjusted net income attributable to Yum China | $233 | $63 | Non-GAAP |
| Adjusted EBITDA | $476 | $219 | Non-GAAP |
- Company sales increased 51% reported and 40% excluding foreign exchange. System sales rose 34% excluding foreign exchange; same-store sales increased 10%, compared with declines of 20% and 15%, respectively, in Q1 2020.
- Restaurant profit was $435 million versus $165 million; restaurant margin expanded to 18.7% from 10.7%.
- KFC operating profit was $327 million versus $153 million; Pizza Hut reported $60 million versus a $28 million loss. All Other Segments reported a $3 million operating loss versus a $10 million loss.
- Operating cash flow was $331 million, up from $60 million. Capital spending was $165 million versus $87 million. Investing activities used $347 million, primarily reflecting the $261 million Sunner investment and higher capital spending. Financing activities used $55 million, including $50 million in common dividends.
- Cash and cash equivalents were $1.084 billion and short-term investments were $3.026 billion at March 31, 2021. Current assets were $4.756 billion and current liabilities $1.922 billion.
- No bank borrowings were outstanding. Credit facilities totaled approximately $551 million; $17 million was used for bank guarantees. Lease liabilities totaled $2.352 billion, including operating and finance leases.
Material changes, outlook, risks, and unusual items
- Management attributed the sharp year-over-year rebound largely to lapping COVID-affected results, fewer temporary closures, same-store and unit growth, and the Suzhou KFC consolidation. Commodity deflation and higher productivity supported profit; value promotions, reduced landlord and government relief, wage inflation, and higher corporate G&A were offsets.
- Management said recovery remained uneven: dine-in traffic and sales at transportation locations were below 2019 levels, and regional outbreaks and public-health measures continued to affect sales. It expects a full same-store-sales recovery to pre-pandemic levels to take time. The filing provides no specific earnings or sales guidance.
- In Q1 2021, the company acquired a 5% interest in poultry supplier Sunner for approximately $261 million. The investment was carried at fair value; the filing reports an unrealized Sunner loss of $17 million, partly offset by a $1 million Meituan unrealized gain. Total investment loss was $12 million.
- The effective tax rate was 29.6%, down from 32.7%, primarily due to the Meituan investment’s tax impact and lower estimated withholding tax on repatriated earnings.
- A Chinese national transfer-pricing audit concerning related-party transactions from 2006–2015 remains ongoing and focuses on the YUM franchise arrangement. The potential outcome cannot be reasonably estimated; additional tax, interest, and penalties could materially affect results, financial condition, and cash flows.
- The company also disclosed potential exposure under China’s rules on indirect transfers relating to its 2016 separation from YUM. Any resulting tax and related losses would be allocated under the tax matters agreement and could be significant.
- Management stated that existing cash, operating cash generation, and credit facilities should be adequate for operations and anticipated capital expenditures over the next 12 months. Share repurchases remained suspended; $692 million remained under the authorization. A $0.12-per-share dividend was declared after quarter-end.
- Key risks include COVID-19 and consumer recovery, China-U.S. relations and regulation, RMB exchange-rate movements, food and labor costs, competition, and market-value volatility in equity investments. A 10% RMB weakening was estimated to reduce quarterly operating profit by approximately $32 million, assuming other factors unchanged.
Important facts for investors to verify
- How same-store sales, dine-in traffic, and transportation-location sales progress against pre-pandemic levels, and whether regional COVID-19 resurgences affect recovery.
- Developments in the Chinese transfer-pricing audit and any potential liability under the indirect-transfer tax provisions.
- Operating margin and cash-flow durability as temporary relief declines and wage, commodity, and promotion costs change.
- Fair-value movements and concentration risk in the Sunner and Meituan investments, alongside planned capital spending and shareholder returns.
- RMB exposure, lease obligations, and the availability and terms of credit facilities; the filing reports no bank borrowings at quarter-end.