Yum! Brands, Inc. — Q1 2021 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2021, compared with Q1 2020. Yum! franchises or operates more than 50,000 KFC, Pizza Hut, Taco Bell and Habit Burger Grill restaurants in over 150 countries; 98% were franchised. Results reflect ongoing COVID-19 effects and a full quarter of Habit Burger Grill operations, versus only 14 days in Q1 2020.
Financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $1.486 billion | $1.263 billion |
| Operating profit | $543 million | $250 million |
| Net income | $326 million | $83 million |
| Diluted EPS | $1.07 | $0.27 |
| Operating cash flow | $324 million | $238 million |
| Capital spending | $45 million | $35 million |
| Cash and cash equivalents at period end | $561 million | $730 million at Dec. 31, 2020 |
| Total debt, approximately | $10.6 billion | — |
Revenue increased 18%; operating profit more than doubled, and net income rose to $326 million. Operating margin was approximately 36.5%, versus 19.8% in Q1 2020. Company restaurant profit was $84 million and company restaurant margin was 17.6%, up from $57 million and 16.2%. The company declared a $0.50 per-share dividend, versus $0.47 a year earlier, and repurchased 2.6 million shares for $275 million.
Cash provided by operations was $324 million. Investing activities provided $14 million, compared with $441 million used in the prior-year quarter, which included the Habit acquisition. Financing activities used $563 million, including $286 million of share repurchases and $150 million of dividends; cash, cash equivalents and restricted cash ended at $802 million.
Current assets were $1.454 billion and current liabilities were $1.479 billion. Long-term debt was $10.229 billion and short-term borrowings were $394 million. Management reported that approximately 93% of debt, including swaps, was fixed-rate, with an effective overall rate of approximately 4.8%, and net leverage was in line with its approximately 5.0x EBITDA target. The $1.25 billion revolving facility was undrawn. Management said available operating cash flow, cash and revolver capacity were sufficient for anticipated needs over the next 12 months.
Material changes and drivers
- Worldwide same-store sales rose 9%, versus a 7% decline in Q1 2020; system sales grew 11% excluding foreign exchange. Net new units were 435, or 1% year-over-year growth.
- Core operating profit increased 33%. Segment same-store sales growth was 8% at KFC, 12% at Pizza Hut and 9% at Taco Bell. Segment operating profit increased 34%, 34% and 24%, respectively.
- Q1 2021 operating profit benefited from $6 million of net franchise bad-debt recoveries, compared with $28 million of expense in Q1 2020. This year-over-year swing benefited operating-profit growth by $34 million.
- The prior-year comparison included a $139 million Habit Burger Grill goodwill impairment and $34 million of net investment expense. Q1 2021 included a $6 million property-sale gain. Management reported diluted EPS excluding special items of $1.07, versus $0.64 in Q1 2020.
- Foreign currency translation favorably affected divisional operating profit by $16 million. Habit Burger Grill contributed a full quarter of operations in 2021; its acquisition increased consolidated system sales by 1%.
Outlook, risks and unusual items
- No specific full-year earnings or sales guidance was provided. Management said COVID-19’s ongoing, variable effects made the remainder of 2021 difficult to forecast. Nearly 900 restaurants remained temporarily closed in Q1, primarily in regions with restrictions. Management cited recovery pace, restaurant reopenings and continuation of sales trends as key uncertainties.
- Management noted that sales gains at restaurants emphasizing drive-thru, carryout and delivery could weaken if pandemic restrictions recede and industry operations normalize. It also said quarterly operating-profit comparisons would continue to be affected by prior-year franchise bad-debt expense and recoveries, but did not expect a significant full-year 2021 impact from bad debt.
- On March 15, 2021, the company refinanced credit facilities, including a $1.5 billion Term Loan B, a $750 million Term Loan A and a $1.25 billion revolver. Refinancing-related fees and debt-cost write-offs added approximately $12 million to Q1 interest expense. After quarter-end, the company issued $1.1 billion of 4.625% notes due 2032 and announced redemption of $1.05 billion of 5.25% notes due 2026, at a call premium.
- A regulatory action in India seeks approximately $150 million in penalties against a subsidiary and former directors. The penalty order is stayed; the company disputes liability and does not consider a significant loss probable. Potential undiscounted payments under lease guarantees were approximately $425 million; the recorded expected-loss liability was not material.
- The company said there were no material changes to its previously disclosed risk factors or market-risk disclosures. Management concluded disclosure controls were effective; the interim financial statements received a review, not an audit.
Important facts for investors to verify
- How much Q1 sales and profit growth reflects recovery from pandemic-affected 2020 comparisons, foreign exchange, Habit Burger Grill and the $34 million bad-debt swing.
- Whether same-store sales momentum continues as restrictions and dining patterns change, and whether the nearly 900 temporary closures reopen.
- Debt maturities, refinancing costs, interest-rate exposure, leverage and the effect of the 2026-note redemption and 2032-note issuance.
- Franchisee financial health, franchise receivables and potential lease-guarantee exposure, particularly if pandemic-related pressures persist.
- Developments in the India enforcement action, including the scheduled August 9, 2021 hearing and continuing status of the stay.