YUM! Brands, Inc. — Q1 2019 Form 10-Q
Reporting period: Quarter ended March 31, 2019; comparisons are with the quarter ended March 31, 2018 unless otherwise noted. YUM operates KFC, Pizza Hut and Taco Bell in more than 145 countries and territories. About 98% of its more than 48,000 restaurants were franchised at quarter-end.
Financial results and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $1.254 billion | $1.371 billion; down 9% |
| Operating profit | $433 million | $553 million; down 22% |
| Net income | $262 million | $433 million; down 39% |
| Diluted EPS | $0.83 | $1.27; down 35% |
| Diluted EPS excluding special items | $0.82 | $0.90; down 8% |
| Operating cash flow | $300 million | $189 million |
| Capital spending | $44 million | $42 million |
| Cash and cash equivalents | $278 million | $292 million at Dec. 31, 2018 |
| Debt, approximately | $10.1 billion | $10.1 billion at Dec. 31, 2018 |
Company restaurant margin was 18.4%, up 4.0 percentage points year over year; the filing attributes the improvement partly to refranchising and same-store sales. Operating profit as a share of revenue was approximately 34.5%, versus 40.3% a year earlier, with the comparison affected by the prior-year refranchising gain.
At March 31, current assets were $1.186 billion and current liabilities $1.327 billion, a working-capital deficit of approximately $141 million. Management said this deficit is common for YUM’s business model and does not significantly affect liquidity or operations. Cash, cash equivalents and restricted cash totaled $474 million; restricted cash is not freely available for general use. A $1 billion revolving credit facility was undrawn.
Performance changes and business drivers
- Worldwide system sales grew 8% excluding foreign currency effects; same-store sales rose 4%, and net unit growth was 7%. YUM opened 310 net new units in the quarter.
- Reported revenue fell mainly as the company continued refranchising and reduced company-operated sales. Franchise and property revenue increased 5%, while company sales declined 35%.
- KFC: same-store sales increased 5%; operating profit was $236 million, up 7% reported and 14% excluding currency effects.
- Pizza Hut: same-store sales were flat; operating profit was $97 million, up 11% reported and 14% excluding currency effects. Telepizza-related units contributed to reported system-sales and unit growth.
- Taco Bell: same-store sales increased 4%; operating profit was $138 million, up 5%.
- The prior-year quarter included a $156 million refranchising gain and $66 million of Grubhub-related investment income. In Q1 2019, YUM recorded a $20 million pre-tax loss from the Grubhub investment’s fair-value change. These items materially affect comparisons.
- YUM declared dividends of $0.42 per share, versus $0.36 a year earlier, and repurchased 1.127 million shares for $106 million.
Outlook, commentary and risks
- Management expected 2019 capital spending, net of refranchising proceeds, to be approximately $125 million, including additional technology investment; no specific earnings or revenue guidance is provided in the filing.
- YUM’s stated objectives include G&A of 1.7% of system sales in 2019 and maintaining an optimized capital structure of approximately 5.0x EBITDA leverage. These are targets, not reported quarter-end results.
- The company had returned $5.5 billion to shareholders from 2017 through Q1 2019 toward its $6.5–$7.0 billion target for 2017–2019.
- YUM adopted lease accounting Topic 842 in Q1 2019 without recasting prior periods. At March 31, right-of-use assets were $697 million and lease liabilities $792 million; the filing cautions that adoption affects balance-sheet comparability.
- Telepizza’s master-franchise territory had approximately 2,300 Pizza Hut and Telepizza units; YUM said 100–150 could close due to trade-area overlap. Telepizza targets at least 1,300 new units over ten years and 2,550 over 20 years.
- YUM had potential lease-guarantee payments of approximately $500 million undiscounted ($425 million present value); recorded liability was not material, which management attributed in part to franchisee cross-default provisions. The company also disclosed ordinary-course legal claims it did not expect to have a material adverse effect.
- Management reported effective disclosure controls. It identified no material changes to the risk factors disclosed in its 2018 Form 10-K. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of system-sales and unit growth reflects underlying comparable performance versus the Telepizza alliance, refranchising and foreign currency movements.
- The recurring earnings impact of Grubhub valuation changes and the prior-year refranchising gain when assessing EPS trends.
- Actual progress against 2019 G&A, capital-spending and leverage objectives, and the shareholder-return commitment.
- Debt maturity schedule, interest costs and liquidity available beyond cash balances and the undrawn revolver.
- Lease-accounting effects and the exposure associated with lease guarantees and franchisee performance.