Yum! Brands, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual report; it also provides unaudited fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context
YUM franchises or operates KFC, Pizza Hut, Taco Bell and, from March 18, 2020, The Habit Burger Grill. The system had 50,353 restaurants in 155 countries and territories at year-end; 98% were operated by franchisees. System sales include franchisee restaurant sales, which are not reported as YUM revenue.
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Total revenue | $5.652 billion | $5.597 billion |
| Operating profit | $1.503 billion | $1.930 billion |
| Net income | $904 million | $1.294 billion |
| Diluted EPS | $2.94 | $4.14 |
| Diluted EPS excluding special items | $3.62 | $3.55 |
| Operating cash flow | $1.305 billion | $1.315 billion |
| Capital spending | $160 million | $196 million |
| Cash and cash equivalents at year-end | $730 million | $605 million |
| Total debt, including short-term borrowings | $10.725 billion | $10.562 billion |
Company restaurant profit was $304 million, and the restaurant margin fell to 16.8% from 20.1%. The balance sheet showed current assets of $1.689 billion and current liabilities of $1.675 billion; management said its historically common working-capital deficit is not significant to liquidity. The revolving facility was undrawn at year-end. About 93% of debt was effectively fixed-rate, at an approximate 4.7% overall rate. YUM reported BB/Ba2 credit ratings.
Fourth-quarter revenue was $1.743 billion versus $1.694 billion; operating profit was $482 million versus $546 million; net income was $332 million versus $488 million; and diluted EPS was $1.08 versus $1.58.
Material changes versus the prior year
- Worldwide system sales declined 4% as reported and 3% excluding foreign exchange and the 2019 extra week. Same-store sales fell 6%; net new unit growth was flat on the reported measure.
- By division, same-store sales declined 9% at KFC, 6% at Pizza Hut and 1% at Taco Bell. Core operating profit declined 12% at KFC and 9% at Pizza Hut, while Taco Bell increased 2%.
- GAAP diluted EPS fell 29%, while EPS excluding special items rose 2%. The Grubhub investment generated $69 million of pre-tax income in 2020 versus a $77 million expense in 2019, favorably affecting year-over-year diluted EPS growth by $0.36.
- The Habit acquisition cost $408 million net of acquired cash. YUM recorded a $144 million goodwill impairment charge; Habit reported a $22 million operating loss for the post-acquisition period.
- YUM’s system opened 2,423 restaurants and permanently closed 2,516. Pizza Hut recorded a net unit decline of 1,064, including closures linked to underperforming locations and its shift toward delivery-focused formats.
Outlook, management commentary and risks
- Management said COVID-19 continued to make 2021 results difficult to forecast and expected ongoing adverse impacts. About 98% of the system was open in full or limited capacity as of February 4, 2021; temporary closures had risen again amid renewed restrictions.
- YUM generated $17 billion in system digital sales in 2020, up approximately 45% from 2019, and more than 35,000 restaurants offered delivery. Management cited technology and off-premise investment as strategic priorities.
- Management expected consolidated net leverage to return to its approximately 5.0x EBITDA target by the second quarter of 2021 and G&A as a percentage of system sales to move toward its historical 1.7% target as sustained growth resumed. These are expectations, not guarantees.
- YUM paid $1.88 per share in dividends for 2020 and resumed share repurchases in the fourth quarter after suspending them early in the year. Year-end authorization capacity was $1.75 billion.
- Key risks include further pandemic-related restrictions and changes in customer behavior; franchisee financial distress and lower development; commodity, wage and labor cost pressure; competition and delivery-platform dependence; cyber, privacy and technology risks; and currency, regulatory and geopolitical exposure, particularly through Yum China.
- YUM is secondarily liable on certain franchisee leases, with potential undiscounted payments of approximately $425 million; the recorded expected exposure was not material. An Indian regulatory penalty of approximately $150 million was stayed by a court; YUM denies liability and does not consider significant loss probable.
Most important facts for investors to verify
- Whether same-store sales, restaurant margins and franchisee financial health recover as pandemic restrictions ease, especially at Pizza Hut.
- Whether management achieves its stated leverage and G&A targets, and how debt maturities, interest costs and cash generation evolve.
- The final purchase-price allocation and any further impairment or operating developments for Habit Burger Grill.
- The status and potential financial impact of the India proceeding, lease guarantees and other material contingencies.
- The distinction between GAAP results and adjusted measures: special items, the Grubhub gain, and tax-related benefits materially affected reported comparisons.