YUM! Brands, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are in millions of dollars except per-share data. YUM operates KFC, Pizza Hut and Taco Bell; approximately 98% of its more than 48,000 restaurants were franchised.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $1,310 | $1,368 | $2,564 | $2,739 |
| Operating profit | $471 | $449 | $904 | $1,002 |
| Net income | $289 | $321 | $551 | $754 |
| Diluted EPS | $0.92 | $0.97 | $1.75 | $2.25 |
| Operating cash flow | — | $461 | $381 |
- Reported revenue fell 4% in Q2 and 6% year to date; operating profit rose 5% in Q2 but declined 10% year to date. Net income fell 10% and 27%, respectively.
- Management’s non-GAAP diluted EPS, excluding special items, was $0.93 in Q2, up 15%, and $1.76 year to date, up 2%. Core operating profit grew 18% in Q2 and 15% year to date; these measures exclude specified items and, for core profit, foreign-exchange effects.
- Worldwide same-store sales grew 5% in Q2 and 4% year to date. Excluding foreign currency, system sales grew 10% and 9%, respectively. Q2 divisional same-store sales: KFC +6%, Pizza Hut +2%, Taco Bell +7%.
- Company restaurant margin was 20.0% in Q2 versus 17.8% a year earlier; year-to-date margin was 19.2% versus 16.1%. Taco Bell cited higher labor and operating costs as a quarterly margin headwind.
- Operating cash flow was $461, investing cash outflow $52, and financing cash outflow $492 year to date. Cash, cash equivalents and restricted cash totaled $389 at June 30, down from $474 at year-end; balance-sheet cash and equivalents alone were $252.
- At June 30, current assets were $1,122 and current liabilities $1,186. Reported short-term borrowings were $325 and long-term debt $9,869. The company also reported $796 of lease liabilities following adoption of the new lease standard. A $1 billion revolving facility had $157 outstanding.
- YUM repurchased $302 of shares and paid $257 in dividends year to date. Dividends declared were $0.42 per share in Q2.
Material changes and notable items
- Company sales declined as refranchising reduced company-operated stores, while franchise and property revenues increased. Total restaurant count was 48,769, up 7% year over year; company-operated units declined 34% to 859.
- Refranchising gains were $4 in Q2 and $10 year to date, compared with $29 and $185 in the prior-year periods. This reduced the benefit to reported year-to-date operating profit versus the prior year.
- YUM recorded $24 of Q2 and $4 of year-to-date pretax fair-value income on its Grubhub investment, versus $25 and $91 in the comparable 2018 periods. Management said the year-over-year change in this investment materially affected EPS comparisons.
- The effective tax rate rose to 23.3% in Q2 and 18.5% year to date, from 9.9% and 12.9%. The company cited tax-law effects, including global intangible low-taxed income, and the comparison with prior-year items.
- YUM adopted lease accounting Topic 842 in Q1 2019 without recasting prior periods. At June 30, operating lease right-of-use assets were $663 and operating lease liabilities were $727.
- Q2 included $8 of other expense and $2 of interest expense to settle contingent consideration related to the 2013 Turkey acquisitions.
Outlook, management priorities and risks
- The filing provides strategic targets rather than explicit earnings guidance. YUM expected 2019 capital spending net of refranchising proceeds of approximately $125, including strategic technology investments; its longer-term efficiency plan targets less than $100 of maintenance and other capital spending, excluding additional strategic investment.
- Management targeted 2019 G&A at 1.7% of system sales and an optimized capital structure of approximately 5.0x EBITDA leverage. It had returned $5.7 billion to shareholders from 2017 through Q2 2019 toward a stated $6.5–$7.0 billion target for 2017–2019.
- The Telepizza alliance added 1,305 units to Pizza Hut’s count and is intended to support expansion; its effect on Q2 and year-to-date operating profit was not significant. The alliance’s 3.5% fees and related credits/incentives may affect future revenue.
- Potential exposure on guaranteed or assigned restaurant leases was approximately $500 undiscounted, or $400 present value; recorded probable exposure was not material. The company reported ongoing legal claims but did not expect them to have a material adverse effect. It said there were no material changes to previously disclosed risk factors.
- Management stated that current liabilities exceeding current assets is customary for YUM’s business model and did not significantly affect liquidity. The interim financial statements are unaudited; KPMG performed a review and reported no material modifications were needed for GAAP conformity.
Important facts for investors to verify
- Whether same-store sales, unit growth and franchise economics continue to offset the effect of refranchising on reported revenue and company sales.
- How much of reported and adjusted EPS performance reflects operating results versus Grubhub fair-value changes, refranchising gains, tax items and other special items.
- Debt, interest costs, leverage relative to management’s approximately 5.0x EBITDA target, and availability under the revolving facility.
- Progress toward 2019 capital-spending, G&A and shareholder-return targets, including the funding required for technology investment and dividends/buybacks.
- Lease obligations and contingent exposures, including the company’s guaranteed lease commitments and the eventual financial impact of legal matters.