Yum! Brands, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unless stated otherwise, amounts are in millions of dollars. Yum! operated or franchised more than 50,000 restaurants across 150-plus countries and territories; 98% were franchisee-operated. The Habit Burger Grill was acquired on March 18, 2020.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Year to date 2020 | Year to date 2019 |
|---|---|---|---|---|
| Total revenue | $1,198 | $1,310 | $2,461 | $2,564 |
| Operating profit | $300 | $471 | $550 | $904 |
| Net income | $206 | $289 | $289 | $551 |
| Diluted EPS | $0.67 | $0.92 | $0.94 | $1.75 |
| Operating cash flow | — | $362 | $461 |
- Q2 revenue fell 9%, operating profit 36%, net income 29%, and diluted EPS 27% year over year. First-half revenue declined 4%, operating profit 39%, net income 48%, and diluted EPS 46%.
- Worldwide same-store sales fell 15% in Q2 and 11% year to date; system sales excluding foreign exchange declined 12% and 8%, respectively. Reported system sales fell 14% and 9%.
- Company restaurant profit was $54 million in Q2 versus $73 million; restaurant margin was 13.4% versus 20.0%. First-half restaurant profit was $111 million versus $134 million, with margin of 14.7% versus 19.2%.
- Q2 division same-store sales declined 21% at KFC, 9% at Pizza Hut, and 8% at Taco Bell. Division operating profit was $153 million, $87 million, and $154 million, respectively; Habit Burger Grill recorded a $6 million operating loss.
- First-half operating cash flow was $362 million; investing cash outflow was $472 million, primarily reflecting the $408 million net Habit acquisition cost. Financing cash inflow was $808 million. Cash and cash equivalents ended June at $1.243 billion; cash, restricted cash, and restricted cash equivalents totaled $1.448 billion.
- Long-term debt was $11.252 billion and short-term borrowings were $434 million at June 30. Total debt was approximately $11.7 billion excluding finance leases. The company issued $600 million of 7.75% notes due 2025 and ended Q2 with $575 million drawn on its $1 billion revolving facility.
- Dividends declared were $0.47 per share for Q2 and $0.94 year to date. Share repurchases were suspended during the first half.
Material changes and unusual items
- The pandemic drove store closures, reduced hours and dining-room restrictions. Closures peaked at about 11,000 in early April; approximately 5,000 remained closed in mid-June. By the filing date, fewer than 2,500 were fully closed and about 95% of the system was open in full or limited capacity.
- Year-to-date other expense included a $139 million pre-tax ($107 million after-tax) Habit Burger Grill goodwill impairment. The impairment followed lower expected Habit results amid COVID-19 and uncertain recovery assumptions.
- Q2 included a $50 million contribution to the Yum! Brands Foundation under its “Unlocking Opportunity Initiative.” Management’s non-GAAP diluted EPS excluding special items was $0.82 for Q2 and $1.46 year to date, versus GAAP EPS of $0.67 and $0.94.
- Changes in the value of the Grubhub investment generated $84 million of pre-tax income in Q2 and $62 million year to date, benefiting EPS by approximately $0.21 and $0.15, respectively. These non-operating gains partly offset weaker operating results.
- Franchisee bad-debt expense was $13 million in Q2 and $42 million year to date, increases of $11 million and $33 million from the comparable periods, mainly related to certain KFC franchisees.
- Pizza Hut’s largest U.S. franchisee, NPC International, filed for Chapter 11 on July 1, 2020. Yum had reserved some amounts due and said further bad debts, lease payments, store closures, or lower advertising contributions could affect results; the impact was difficult to forecast.
Outlook, liquidity, and risks
- Management provided no quantified full-year guidance and said COVID-19 makes the remainder of 2020 difficult to forecast. It expected continuing adverse effects; reopening pace, sales trends, renewed restrictions, and the pandemic’s duration were key uncertainties.
- Management reported same-store sales at open stores had stabilized in June a few points short of flat, with trends continuing through the filing date. It cited delivery and carry-out demand as partly offsetting dine-in-related pressure in some markets.
- Yum said approximately 88% of debt, including the effect of interest-rate swaps, was fixed, with an effective overall interest rate of approximately 4.7%. Its stated consolidated net-leverage target was about 5.0x EBITDA; the filing does not provide a clear current leverage multiple in this text. The company said it was managing toward that target and continued repayment of revolving borrowings.
- To support franchisees, Yum deferred certain capital obligations and granted generally 60-day grace periods on certain royalties. Approximately $60 million was outstanding under these grace periods at June 30, mostly due later in 2020.
- Potential lease-guarantee payments were approximately $450 million undiscounted, or $375 million present value; the recorded expected-loss liability was not material. Most underlying leases have franchisees as primary obligors.
- In India, a regulatory order imposed an approximately $145 million penalty on a subsidiary and former directors. A court stayed the order pending a hearing scheduled for October 1, 2020. Yum denied liability and said a significant loss was not considered probable.
- Management identified possible further impairment, franchisee financial distress and nonpayment, supply or labor disruptions, higher operating costs, and adverse effects on borrowing access or liquidity as risks. Disclosure controls were reported effective; the interim financial statements received an independent accountant’s review.
Important facts for investors to verify
- Whether COVID-related restrictions, restaurant closures, and same-store sales trends improve or deteriorate, and how these changes affect franchisees and collections.
- NPC International’s restructuring outcome, including potential receivable losses, lease obligations, unit transitions, and effects on Pizza Hut sales and advertising.
- Habit Burger Grill’s performance and the assumptions underlying its impairment and remaining purchase-price allocation.
- Cash generation, revolving-facility repayments, debt maturities, interest costs, and progress toward the stated leverage target.
- Whether Grubhub fair-value gains and other unusual items recur; reported operating performance excluding those items and special charges.
- The status and potential exposure of the stayed India penalty order and lease guarantees.