Yum! Brands, Inc. (NYSE:YUM), the global leader in the quick-service restaurant industry, has once again demonstrated the resilience of its business model, delivering impressive financial results in the first quarter of 2024 despite a challenging operating environment.

Financials

The company reported annual net income of $1,597 million and annual revenue of $7,076 million in its most recent fiscal year. Its annual operating cash flow reached $1,603 million, while its annual free cash flow stood at $1,318 million, showcasing the strength of its cash generation capabilities.

In the first quarter of 2024, Yum! Brands reported system sales growth of 2%, driven by a 6% increase in unit count. Despite facing headwinds from the impact of the Middle East conflict, which the company estimates created a low single-digit drag on its overall same-store sales growth, the company managed to deliver 6% core operating profit growth, exceeding its internal plan and demonstrating the resilience of its profit model.

Divisional Performance

The company's first-quarter results were highlighted by the strong performance of its Taco Bell division, which grew system sales by 4% and delivered industry-leading margins. Taco Bell's focus on key levers within its "magic formula," including building brand buzz, providing value to consumers, and expanding into new category entry points, has proven successful in navigating the challenging environment.

Yum!'s KFC division, which accounts for 51% of the company's divisional operating profit, also delivered a solid performance, growing system sales by 4% despite a 2% decline in same-store sales. The division's international operations, particularly in Latin America, Africa, and Greater Asia, were the key drivers of this growth, with system sales in these regions increasing by 22%, 11%, and 8%, respectively.

The Pizza Hut division, which comprises 15% of Yum!'s divisional operating profit, faced a more challenging quarter, with system sales declining 4% due to a 7% decrease in same-store sales. The company attributed this performance to difficult year-over-year comparisons and the ongoing impact of the Middle East conflict.

Yum!'s Habit Burger Grill division reported a 2% decline in system sales, with 6% unit growth. However, the division saw margin trends improve throughout the quarter, with a 60-basis-point year-over-year improvement in store-level margins.

Digital Strategy

One of the standout achievements for Yum! in the first quarter was the milestone of surpassing 50% digital sales mix across its global system. This significant milestone underscores the company's successful execution of its digital and technology strategy, which has been a key focus area in recent years.

Yum!'s Chief Digital and Technology Officer, Joe Park, recently shared the company's plans to further leverage its digital capabilities and data assets to drive innovation and enhance the customer experience. This includes the deployment of AI-powered tools across various aspects of the business, from marketing and operations to insights and engineering.

Liquidity

The company's balance sheet and liquidity position remain strong, with a net leverage ratio of 4.1x at the end of the first quarter. Yum! also completed the acquisition of 218 KFC franchise restaurants in the U.K. and Ireland, a strategic move that is expected to provide approximately $40 million in incremental EBITDA over the next 12 months.

Outlook

Looking ahead, Yum! remains confident in its ability to deliver at least 8% core operating profit growth for the full year 2024, excluding the benefit of the 53rd week. The company expects its full-year Taco Bell company-operated margins to be in the range of 23% to 24% and its ex-special G&A to be flat to slightly down for the year.

Yum!'s robust development pipeline, with 81 brand-country combinations experiencing unit growth in the first quarter, and its focus on leveraging technology to drive operational efficiencies and enhance the customer experience, position the company well to navigate the current industry challenges and deliver sustained, above-market shareholder returns.

Conclusion

Yum! Brands' first-quarter performance showcases the strength and resilience of its diversified business model, the effectiveness of its strategic initiatives, and the dedication of its talented team. As the company continues to execute on its Good Growth strategy, investors can look forward to the company's continued success in the years to come.