Business context and reporting period
YUM! Brands, Inc. filed this unaudited Form 10-Q for the quarter and year to date ended September 30, 2019. It franchises or operates KFC, Pizza Hut and Taco Bell restaurants; 98% of its more than 49,000 restaurants were franchise-operated. Comparisons below are against the same 2018 period.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Total revenue | $1.339bn | $1.391bn | $3.903bn | $4.130bn |
| Operating profit | $480m | $553m | $1.384bn | $1.555bn |
| Net income | $255m | $454m | $806m | $1.208bn |
| Diluted EPS | $0.81 | $1.40 | $2.57 | $3.64 |
| Operating cash flow | Not provided by quarter | $883m | $796m |
- Quarter revenue declined 4%; company sales fell 27%, largely reflecting refranchising, while franchise and property revenue rose 7% and advertising contributions rose 15%. YTD revenue declined 5%.
- Core operating profit, a company-defined non-GAAP measure excluding special items and currency effects, increased 6% in Q3 and 12% YTD. Reported operating profit was lower, mainly because refranchising gains were much smaller: $8m versus $100m in Q3 and $18m versus $285m YTD.
- Worldwide company restaurant margin was 20.2% in Q3 versus 20.1%; YTD it was 19.6% versus 17.4%. Same-store sales grew 3% worldwide in Q3 and 4% YTD. Q3 system sales grew 8% excluding currency; YTD growth was 9% (company-reported figures include Telepizza alliance effects).
- Q3 diluted EPS excluding special items was $0.80, down 23%; YTD it was $2.55, down 7%. Management attributed $0.37 of the quarterly and $0.58 of the YTD year-over-year EPS decline to changes in the Grubhub investment’s fair value.
- Cash and cash equivalents were $691m at September 30, 2019, versus $292m at year-end; cash, restricted cash and restricted cash equivalents totaled $836m. The $1bn revolving facility was undrawn.
- Long-term debt was $10.491bn and short-term borrowings were $84m, compared with $9.751bn and $321m, respectively, at year-end. Shareholders’ deficit was $8.097bn. Operating lease liabilities of $791m were recognized following adoption of the new lease standard.
- YTD investing cash flow was an outflow of $54m, versus an inflow of $89m in 2018; financing cash outflow was $440m versus $2.161bn. YTD dividends paid were $385m and share repurchases were $472m.
Material changes versus prior period
- Net income fell 44% in Q3 and 33% YTD. Alongside lower refranchising gains, Grubhub fair-value movements changed from gains of $94m in Q3 2018 and $185m YTD 2018 to expenses of $60m and $56m, respectively, in 2019.
- Franchise-led growth continued: the restaurant count rose 7% year over year to 49,158, while company-owned units declined 25% to 883. YUM opened 389 net new units in Q3 and 1,011 YTD.
- On September 11, YUM issued $800m of 4.75% senior notes due 2030. Proceeds helped repay $250m of notes due that month, repay revolving-facility borrowings and fund general corporate purposes.
- YUM adopted Topic 842 lease accounting in 2019 without recasting comparative periods. Adoption added right-of-use assets and lease liabilities and increased reported assets and liabilities.
Outlook, management commentary, risks and contingencies
- Management expected 2019 capital spending net of refranchising proceeds to be approximately $125m, including strategic technology investment; it also targeted G&A at 1.7% of system sales and approximately 5.0x EBITDA leverage.
- YUM stated that it had returned $6.1bn to shareholders from 2017 through Q3 2019 toward its $6.5bn–$7.0bn 2017–2019 commitment. The company repurchased $476m of shares YTD and declared dividends of $1.26 per share YTD.
- Management said Grubhub’s share price had declined further after quarter-end; using the November 4 price, it expected a further $59m pre-tax expense in Q4 2019. This was an estimate, not a reported Q4 result.
- Potential undiscounted payments under lease guarantees were approximately $475m (present value approximately $400m); the recorded probable exposure was not material. Management said pending legal matters were not expected to have a material adverse effect, but ultimate liability for unresolved claims could not be determined.
- Other considerations included foreign-currency effects, restaurant operating costs, franchisee receivables and the execution of brand, technology and development initiatives. The filing reported no material change to previously disclosed risk factors. Management concluded disclosure controls were effective; the independent accountant performed an interim review, not an audit.
Important facts for investors to verify
- Whether underlying operating trends support growth in system sales and core operating profit, distinct from refranchising gains and currency effects.
- The effect of continued Grubhub share-price movements on investment expense, earnings and any subsequent reported results.
- Debt maturities, borrowing costs, leverage and the company’s ability to meet shareholder-return plans while maintaining its stated leverage target.
- Franchisee health and receivable collectability, including the higher Pizza Hut provisions for past-due receivables noted in the quarter.
- Actual capital spending, G&A performance and returns from planned technology and brand investments versus management’s stated targets.