Yum! Brands, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Yum operated more than 50,000 restaurants across 150-plus countries and territories, with 98% franchisee-operated. The Habit Burger Grill acquisition closed March 18, 2020.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $1,263 | $1,254 |
| Operating profit | $250 | $433 |
| Net income | $83 | $262 |
| Diluted EPS | $0.27 | $0.83 |
| Diluted EPS excluding special items (non-GAAP) | $0.64 | $0.82 |
| Operating cash flow | $238 | $300 |
| Cash and cash equivalents at period end | $1,154 | $605 at Dec. 31, 2019 |
| Long-term debt | $11,059 | $10,131 at Dec. 31, 2019 |
| Short-term borrowings | $447 | $431 at Dec. 31, 2019 |
Company restaurant profit was $57 million and restaurant margin was 16.2%, down from $61 million and 18.4%. Worldwide system sales declined 4% reported and 3% excluding foreign exchange; same-store sales declined 7%. Core operating profit, a non-GAAP measure excluding special items and FX, was $401 million, down 6%. The effective tax rate was 12.5%, versus 12.3%. Dividends declared were $0.47 per share, compared with $0.42.
Operating cash flow fell $62 million year over year. Investing used $441 million, mainly reflecting the $408 million net Habit acquisition outlay; financing provided $798 million, including $950 million of net Revolving Facility borrowings. Cash, cash equivalents and restricted cash totaled $1,310 million at quarter end. Shareholders’ deficit was $8,229 million.
Material changes and unusual items
- COVID-19 materially affected results: worldwide same-store sales fell 7%, after deteriorating sharply in March. About 20% of restaurants were closed at the peak, approximately 11,000; about 9,500 remained closed as of the filing date.
- Yum recorded a $139 million pretax goodwill impairment for Habit Burger Grill, equivalent to a $107 million after-tax charge and approximately $0.35 of diluted EPS. Special items also included $6 million of acquisition and integration costs. Reported other expense was $152 million.
- Habit was acquired for $408 million net of acquired cash. Preliminary purchase accounting included $219 million of goodwill; the company said the allocation remained subject to measurement-period updates. Habit’s post-acquisition operations had an insignificant effect on Q1 results.
- Franchise bad-debt expense rose to $29 million from $7 million. The allowance for doubtful accounts was $101 million, compared with $72 million at year-end; approximately half of the short-term receivable allowance related to Pizza Hut U.S. franchisees.
- Yum borrowed $950 million under its revolving facility by March 31, including borrowing to fund the Habit acquisition and to bolster liquidity amid the pandemic. On April 1, it issued $600 million of 7.75% notes due 2025.
- Foreign-currency translation and derivative movements contributed to a $161 million other comprehensive loss; comprehensive loss was $78 million.
By division, same-store sales were down 8% at KFC and 11% at Pizza Hut, while Taco Bell grew 1%. Segment operating profit was $224 million at KFC, $76 million at Pizza Hut and $144 million at Taco Bell; Habit reported a $2 million loss.
Outlook, risks and contingencies
- Management expected Q2 2020 same-store sales declines to exceed Q1’s 7% decline and warned of possible adverse effects beyond Q2. The company said the outlook was highly uncertain and depended largely on restaurant reopenings and sales recovery. Recent trends in open restaurants had improved, but no quantified full-year guidance was provided.
- Yum suspended its share repurchase program and reduced nonessential spending and capital plans. It offered certain qualifying franchisees payment grace periods, generally 60 days, and deferred some development and remodel obligations. These measures may weigh on near-term cash flow and collections.
- Franchisee financial stress could cause further bad debts, closures, reduced development, lower advertising contributions, or trigger Yum’s secondary lease obligations. Yum cited uncertainty around Pizza Hut U.S. franchisee transitions and the financial condition of its largest U.S. franchisee.
- Yum disclosed an Indian regulatory penalty order of approximately $150 million against its subsidiary and former directors. The Delhi High Court stayed the order pending a hearing scheduled for June 16, 2020; Yum denied liability and said significant loss was not probable.
- Potential undiscounted payments under lease guarantees were approximately $450 million, with a discounted present value of approximately $350 million; recorded expected-loss liability was not material. The company also noted heightened uncertainty in impairment and credit-loss estimates.
Important facts for investors to verify
- Whether restaurant reopenings and same-store sales recovery progressed as expected after the filing date, including the Q2 impact.
- Whether COVID-related franchisee distress led to additional bad debts, permanent closures, lease-guarantee payments or further assistance.
- Final Habit purchase-price allocation and whether additional impairment charges were recorded.
- Liquidity, debt and covenant capacity after the revolver draw and April 2020 note issuance.
- Developments in the India penalty proceeding and the Pizza Hut U.S. franchisee transition.