Louisville / KY. (yb) Yum! Brands Inc. reported results for the third quarter 2016, ended September 03, including GAAP EPS of 1.56 USD and EPS excluding Special Items of 1.09 USD. System sales growth figures exclude foreign currency translation (F/X) and core operating profit growth figures exclude F/X and Special Items. Special Items are not allocated to any segment and therefore only impact worldwide GAAP results.
Third-Quarter Highlights
- KFC Division same-store sales increased 4 percent, with U.S. same-store sales growing 6 percent; system sales increased 7 percent.
- Taco Bell Division same-store sales increased 3 percent and system sales increased 5 percent, while achieving a 21.7 percent restaurant margin.
- Worldwide core operating profit grew 11 percent, with the brand divisions excluding China delivering 11 percent core operating profit growth in aggregate, ahead of expectations.
- China core operating profit grew 14 percent.
- Opened 475 new restaurants worldwide; 78 percent of international development occurred in emerging markets.
- On track to finalize China separation with Yum China Holdings, Inc. expected to begin trading on November 1, 2016 on the NYSE under the ticker symbol “YUMC.”
- Foreign currency translation negatively impacted operating profit by 34 million USD.
Chief Executive’s Commentary
Greg Creed, CEO, said “Yum! Brands delivered third-quarter core operating profit growth of 11 percent and EPS growth, excluding Special Items, of 9 percent. For the full year, we are raising our core operating profit growth guidance from at least 14 percent to at least 15 percent.
In the third quarter, I was pleased with both KFC’s and Taco Bell’s performance, each of which returned to a focus on core menu items, but in ways that were distinctive, disruptive and relevant. Both brands had accelerating same-store sales growth, despite sluggish QSR industry trends, especially in the U.S. Excluding China, our brand divisions in aggregate delivered core operating profit growth of 11 percent, which was ahead of our expectations. System sales for the brand divisions excluding China grew 5 percent in constant currency, driven by KFC where system sales grew 7 percent with international emerging markets up an impressive 12 percent. We are excited about the momentum we are seeing in our base business as we embark on the next chapter of growth at our company.
Sales were off to a good start in the first six weeks of the quarter in the China Division. However, anticipated tougher laps in the second half of the third quarter were compounded by an international court ruling on claims regarding the South China Sea, which triggered a series of regional protests and negative sentiment against a few international companies with well-known Western brands. If not for this event, we believe the China Division would have delivered its fifth consecutive quarter of positive same-store sales growth. The good news is the incident was short-lived and the sales impact continued to dissipate through August and September. Despite the protests, Pizza Hut Casual Dining continued its trend of quarterly sequential improvement.
2016 marks the beginning of a massive transformation for Yum! Brands. Step one is the formal separation of our China business, which will become one of China’s largest publicly-traded retail companies with meaningful growth opportunities supported by U.S. governance. New Yum! Brands will become a unique and focused world-class franchisor with consistent, stable cash flow generation and an efficient cost structure that encourages growth. We look forward to sharing the details of our strategic plans for both companies at our New York investor conference on Tuesday, October 11.”
New Global Yum! Core Operating Profit Growth
After the spin-off of our China business, we will reclassify China Division’s historical results and related tax expense, including the first ten months of 2016, to Discontinued Operations within our Income Statement. The China Division’s results presented in Discontinued Operations will include an incremental license fee expense similar to what will be paid by China to Yum! going forward. Likewise, Yum!’s historical results for our KFC and Pizza Hut Divisions, including the first ten months of 2016, will include incremental license fee income from our China business such that recast total net income, including Discontinued Operations, is the same as previously reported results. While we expect to spin-off our China business on October 31, 2016, our operating profit growth targets assume China will remain part of Yum! through the end of 2016.
- China Division system sales increased 3 percent, excluding foreign currency translation.
- China Division opened 133 new units during the quarter.
- Operating profit increased as a result of recent value-added tax reform in China and new-unit development, partially offset by higher labor costs, increased G+A and sales deleverage.
- Foreign currency translation negatively impacted operating profit by 23 million USD.
- Consistent with prior years, China Division’s third quarter includes June, July and August results.
- KFC Division system sales increased 7 percent, excluding foreign currency translation.
- KFC Division opened 138 new international restaurants in 42 countries, including 96 units in emerging markets.
- Operating margin increased 2.2 percentage points driven by same-store sales growth.
- Foreign currency translation negatively impacted operating profit by 11 million USD, as approximately 90 percent of division profits are generated outside the U.S.
- Pizza Hut Division system sales were even, excluding foreign currency translation.
- Pizza Hut Division opened 105 new international restaurants in 40 countries, including 71 units in emerging markets.
- Restaurant margin was 3.1 percent, a decrease of 4.7 percentage points, driven by refranchising and higher property and casualty insurance costs.
- Foreign currency translation negatively impacted operating profit by less than 1 million USD.
- Taco Bell Division system sales increased 5 percent, excluding foreign currency translation.
- Taco Bell Division opened 63 new restaurants.
- Restaurant margin was 21.7 percent, a decrease of 0.4 percentage points, driven by higher labor costs, partially offset by same-store sales growth and lower commodity costs.
- Operating margin increased 2.0 percentage points driven by same-store sales growth.
Special Items / Share Repurchase / Recapitalization Update
- During the quarter, we recorded a tax benefit of 198 million USD in Special Items due to our ability to now realize tax benefits associated with previous impairment losses related to Little Sheep that were recognized as Special Items in 2013 and 2014.
- During the quarter, we incurred a Special Items charge of 20 million USD for restructuring costs related to U.S. voluntary retirement packages.
- During the quarter, we incurred a Special Items charge of 10 million USD for costs related to the planned separation of our China business.
- During the quarter, we re-franchised 94 units outside of China, more than half of which were Pizza Hut units, for proceeds of 61 million USD. We recorded refranchising gains of 21 million USD in Special Items.
- To complete our recapitalization strategy, 4.6 billion USD of new debt was issued in the third quarter.
- Year-to-date through October 4, 2016, we repurchased 54.5 million shares totalling 4.5 billion USD at an average price of 82 USD. Since we announced our intention to separate the China business, we have repurchased approximately 5.3 billion USD in shares at an average price of 81 USD, reducing our share count by approximately 15 percent. We expect to repurchase an additional 0.9 billion USD in shares before the end of 2016 to achieve our previously announced plan to return 6.2 billion USD of capital to shareholders (excluding dividends) in connection with the separation of our China business.
