Yum! Brands, Inc. — Q1 2023 Form 10-Q
Business context and period. Results cover the three months ended March 31, 2023, compared with the same period in 2022. Yum! franchises or operates more than 55,000 restaurants across KFC, Taco Bell, Pizza Hut and Habit Burger Grill; 98% were franchisee-operated.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $1.645 billion | $1.547 billion | +6% |
| Operating profit | $523 million | $509 million | +3% |
| Net income | $300 million | $399 million | -25% |
| Diluted EPS | $1.05 | $1.36 | -23% |
| Operating cash flow | $349 million | $253 million | +$96 million |
| Capital spending | $62 million | $42 million | +$20 million |
- System sales increased 11% excluding foreign currency effects; same-store sales rose 8%. The company reported 746 gross openings and 323 net new units. Core operating profit, excluding special items and FX, grew 11%; diluted EPS excluding special items was $1.06, versus $1.05.
- Company restaurant profit was $71 million, with a 14.9% margin, up from $68 million and 14.5%. KFC’s margin declined to 12.0% from 14.1%, with commodity inflation cited; Taco Bell’s rose to 22.2% from 21.9%.
- Net cash used in investing activities was $56 million; net cash used in financing was $334 million, including $169 million of dividends paid and $50 million of share repurchases. Cash, cash equivalents and restricted cash totaled $609 million at quarter-end; balance-sheet cash and equivalents were $349 million.
- Debt carrying amounts were approximately $11.75 billion, including current maturities. Management reported 4.9x consolidated net leverage and an effective overall interest rate of approximately 4.5%; about 94% of debt was fixed, including swaps. Net interest expense increased to $130 million from $118 million.
- Total current assets were $1.546 billion versus current liabilities of $1.555 billion. Management cited approximately $350 million of cash on hand and $1.25 billion of revolving-facility capacity, with $194 million outstanding, and expects these resources and operating cash flows to meet cash needs for the next 12 months.
Changes, outlook and notable items
- Revenue growth reflected higher franchise and property revenue and advertising contributions. GAAP earnings fell partly because Q1 2022 included an $82 million discrete tax benefit that was subsequently reversed in 2022; Q1 2023 also included a $23 million pre-tax loss on the Devyani investment. FX reduced divisional operating profit by $27 million.
- Management expected foreign currency to reduce divisional operating profit by approximately $10 million to $20 million in Q2 2023. It also said annual operating cash flows had exceeded $1.3 billion in each of the prior four years and expected that to continue in 2023. No broader earnings or sales guidance was provided in the filing text.
- Yum completed its exit from Russia in April 2023 by selling its Russian KFC business. The expected consideration approximated the $166 million carrying value of Russian net assets as of March 31; Q1 results still included Russian KFC operations. Excluding Russia affected reported unit and system-sales growth comparisons.
- A January 2023 ransomware incident led to the one-day closure of fewer than 300 restaurants in one market. The company said employee data was affected, with no evidence that customer databases were accessed; it incurred and may continue to incur response costs. Putative employee class actions were filed in April, and the company did not expect a material adverse effect.
- Contingencies: The IRS proposed $2.1 billion in tax, $418 million in penalties and approximately $830 million in interest related to 2014 transactions. Yum disputes the assessment, has recorded no reserve, and says an unfavorable resolution could materially adversely affect future financial statements. An Indian regulatory matter includes a penalty order of approximately $135 million; the order is stayed, Yum denies liability and does not consider a significant loss probable. Potential undiscounted lease-guarantee payments were approximately $350 million; recorded expected losses were not material.
- Management said disclosure controls were effective and reported no material change in risk factors from the 2022 Form 10-K. The independent accountant’s interim review identified no material modifications needed for GAAP conformity; it was a review, not an audit.
Important facts for investors to verify
- Whether same-store sales and franchise-led growth sustain operating profit as commodity, labor and other operating costs evolve.
- Debt, leverage, interest costs and liquidity, including the timing and amount of upcoming maturities and continued access to revolving credit.
- The outcome and potential financial exposure of the IRS assessment and India regulatory proceedings.
- Final accounting and any subsequent cash or other effects from the Russia divestiture, and the continuing financial or legal effects of the ransomware incident.
- The effect of FX and changes in the fair value of the Devyani investment on reported earnings and any future guidance.