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Item 2 — Management's Discussion and Analysis
Yum China Holdings, Inc. · 10-Q · Q2 FY2026 · Period ended Jun 30, 2026
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References to the Company throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (this “MD&A”) are made using the first person notations of “we,” “us” or “our.” This MD&A contains forward-looking statements, including statements with respect to the ongoing transfer pricing audit, the retail tax structure reform, our growth plans, future capital resources to fund our operations and anticipated capital expenditures, share repurchases and dividends, and the impact of new accounting pronouncements not yet adopted. See “Cautionary Note Regarding Forward-Looking Statements” at the end of this Item 2 for information regarding forward-looking statements.
Introduction
Yum China Holdings, Inc. is the largest restaurant company in China in terms of 2025 system sales, with 19,297 restaurants covering over 2,700 cities primarily in China as of June 30, 2026. Our growing restaurant network consists of our flagship KFC and Pizza Hut brands, as well as emerging brands such as Lavazza, Huang Ji Huang, Little Sheep and Taco Bell. We have the exclusive right to operate and sublicense the KFC, Pizza Hut and, subject to the agreed terms, Taco Bell brands in China (excluding Hong Kong, Macau and Taiwan), and own the intellectual property of the Little Sheep and Huang Ji Huang concepts outright. We also established a joint venture with Lavazza Group, the world-renowned family-owned Italian coffee company, to explore and develop the Lavazza coffee concept in China. KFC was the first major global restaurant brand to enter China in 1987. With more than three decades of operations, we have developed extensive operating experience in the China market. We believe that there are significant opportunities to further expand within China, and we intend to focus our efforts on increasing our geographic footprint in both existing and new cities.
KFC is the leading and the largest quick-service restaurant (“QSR”) brand in China in terms of 2025 system sales. As of June 30, 2026, KFC operated 13,789 restaurants in over 2,700 cities across China.
Pizza Hut is the leading and the largest casual dining restaurant (“CDR”) brand in China in terms of 2025 system sales and number of restaurants as of December 31, 2025. As of June 30, 2026, Pizza Hut operated 4,549 restaurants in over 1,200 cities.
Overview
We intend for this MD&A to provide the reader with information that will assist in understanding our results of operations, including metrics that management uses to assess the Company’s performance. Throughout this MD&A, we discuss the following performance metrics:
•Certain performance metrics and non-GAAP measures are presented excluding the impact of foreign currency translation (“F/X”). These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the F/X impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.
•System sales growth reflects the results of all restaurants regardless of ownership, including Company-owned and franchise restaurants, except for sales from non-Company-owned restaurants for which we do not receive a sales-based royalty. Sales of franchise restaurants typically generate ongoing franchise fees for the Company at an average rate of approximately 6% of system sales. Franchise restaurant sales are not included in Company sales in the Condensed Consolidated Statements of Income; however, the franchise fees are included in the Company’s revenues. We believe system sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates all of our revenue drivers, Company and franchise same-store sales as well as net unit growth.
•Effective January 1, 2018, the Company revised its definition of same-store sales growth to represent the estimated percentage change in sales of food of all restaurants in the Company system that have been open prior to the first day of our prior fiscal year, excluding the period during which stores are temporarily closed. We refer to these as our “base” stores. Previously, same-store sales growth represented the estimated percentage change in sales of all restaurants in the Company system that have been open for one year or more, including stores temporarily closed, and the base stores changed on a rolling basis from month to month. This revision was made to align with how management measures performance internally and focuses on trends of a more stable base of stores.
•Company sales represent revenues from Company-owned restaurants. Within the analysis of Company sales, Total revenue and Restaurant profit, store portfolio actions represent the net impact from new-unit openings, acquisitions, refranchising and store closures. Net new unit contribution represents net revenue growth primarily from store portfolio actions excluding temporary store closures. Other primarily represents the impact of same-store sales as well as the impact of changes in restaurant operating costs such as inflation/deflation.
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All Note references in this MD&A refer to the Notes to the Condensed Consolidated Financial Statements. Tabular amounts are displayed in millions of U.S. dollars except percentages and per share and unit count amounts, or as otherwise specifically identified. Percentages may not recompute due to rounding. References to quarters are references to the Company’s fiscal quarters.
Quarters and Years to Date Ended June 30, 2026 and 2025
Results of Operations
Summary
The Company has two reportable segments: KFC and Pizza Hut. Our non-reportable operating segments, including the operations of Lavazza, Huang Ji Huang, Little Sheep, Taco Bell and our delivery operating segment, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in the aggregate. Additional details on our reportable operating segments are included in Note 13.
Quarter Ended %/ppts Change Year to Date Ended %/ppts Change
6/30/2026 6/30/2025 Reported Ex F/X 6/30/2026 6/30/2025 Reported Ex F/X
System Sales Growth(a) (%) 6 4 NM NM 5 3 NM NM
Same-Store Sales Growth(a) (%) 1 1 NM NM 1 Even NM NM
Operating Profit 348 304 +14 +7 795 703 +13 +7
Adjusted Operating Profit(b) 348 304 +14 +7 795 703 +13 +7
Core Operating Profit(b) 328 304 NM +7 751 703 NM +7
OP Margin(c) (%) 11.1 10.9 +0.2 +0.2 12.4 12.2 +0.2 +0.2
Core OP Margin(b) (%) 11.1 10.9 NM +0.2 12.4 12.2 NM +0.2
Net Income 244 215 +14 +6 553 507 +9 +3
Adjusted Net Income(b) 244 215 +14 +6 553 507 +9 +3
Diluted Earnings Per Common Share 0.70 0.58 +21 +14 1.57 1.35 +16 +10
Adjusted Diluted Earnings Per Common Share(b) 0.70 0.58 +21 +14 1.57 1.35 +16 +10
NM refers to not meaningful.
(a)System Sales and Same-Store Sales growth percentages as shown in the table exclude the impact of F/X. Effective January 1, 2018, temporary store closures are normalized in the same-store sales calculation by excluding the period during which stores are temporarily closed.
(b)See “Non-GAAP Measures” below for definitions and reconciliations of the most directly comparable GAAP financial measures to the non-GAAP measures.
(c)OP margin is defined as Operating Profit divided by Total revenues.
As compared to the second quarter of 2025, Total revenues in the second quarter of 2026 increased 13%, or 6% excluding the impact of F/X. Total revenues for the year to date ended June 30, 2026 increased 11%, or 5% excluding the impact of F/X. The increase in Total revenues for the quarter ended June 30, 2026, excluding the impact of F/X, was primarily attributable to 5% net new unit contribution and 1% same-store sales growth. The increase in Total revenues for the year to date ended June 30, 2026, excluding the impact of F/X, was primarily driven by 4% net new unit contribution and 1% same-store sales growth.
Operating profit for the second quarter increased 14%, or 7% excluding the impact of F/X. The increase in Operating profit for the quarter ended June 30, 2026 was primarily driven by the increase in Total revenues, efficiency improvement from streamlined operations and favorable commodity prices, partially offset by increased delivery cost associated with higher delivery sales mix in the current period and value-for-money offerings.
Operating profit for the year to date ended June 30, 2026 increased 13%, or 7% excluding the impact of F/X. The increase in Operating profit for the year to date ended June 30, 2026 was primarily driven by the increase in Total revenues, efficiency improvement from streamlined operations and favorable commodity prices, lower closures and impairment and G&A expenses, partially offset by increased delivery cost associated with higher delivery sales mix in the current period and value-for-money offerings.
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Net income for the second quarter increased 14%, or 6% excluding the impact of F/X. Net income for the year to date ended June 30, 2026 increased 9%, or 3% excluding the impact of F/X. The increase in Net income was mainly due to the increase in Operating Profit, partially offset by less interest income from lower investment balance and interest rates.
The Consolidated Results of Operations for the quarters and years to date ended June 30, 2026 and 2025 and other data are presented below:
Quarter Ended % B/(W)(a) Year to Date Ended % B/(W)(a)
6/30/2026 6/30/2025 Reported Ex F/X 6/30/2026 6/30/2025 Reported Ex F/X
Company sales $ 2,910 $ 2,613 11 5 $ 5,957 $ 5,414 10 4
Franchise fees and income 29 24 18 12 59 51 15 9
Revenues from transactions with franchisees 155 115 35 27 311 236 32 25
Other revenues 44 35 27 20 82 67 23 16
Total revenues $ 3,138 $ 2,787 13 6 $ 6,409 $ 5,768 11 5
Company restaurant expenses $ 2,441 $ 2,191 (11 ) (5 ) $ 4,935 $ 4,472 (10 ) (4 )
Operating Profit $ 348 $ 304 14 7 $ 795 $ 703 13 7
OP Margin (%) 11.1 % 10.9 % 0.2 ppts. 0.2 ppts. 12.4 % 12.2 % 0.2 ppts. 0.2 ppts.
Interest income, net 12 25 (52 ) (52 ) 28 51 (48 ) (49 )
Investment loss (6 ) (18 ) 65 65 (17 ) (15 ) (6 ) (6 )
Income tax provision (92 ) (80 ) (14 ) (9 ) (215 ) (199 ) (8 ) (2 )
Equity in net earnings (losses) from equity method investments 2 2 23 16 4 6 (15 ) (20 )
Net Income – including noncontrolling interests 264 233 14 6 595 546 9 3
Net Income – noncontrolling interests 20 18 (11 ) (4 ) 42 39 (7 ) (1 )
Net Income – Yum China Holdings, Inc. $ 244 $ 215 14 6 $ 553 $ 507 9 3
Diluted Earnings Per Common Share $ 0.70 $ 0.58 21 14 $ 1.57 $ 1.35 16 10
Effective tax rate 26.0 % 25.8 % 26.6 % 26.9 %
Supplementary information – Non-GAAP Measures(b)
Restaurant profit $ 469 $ 422 12 5 $ 1,022 $ 942 9 3
Restaurant margin (%) 16.1 % 16.1 % — ppts. — ppts. 17.2 % 17.4 % (0.2 ) ppts. (0.2 ) ppts.
Adjusted Operating Profit $ 348 $ 304 $ 795 $ 703
Core Operating Profit $ 328 $ 304 $ 751 $ 703
Core OP Margin (%) 11.1 % 10.9 % 12.4 % 12.2 %
Adjusted Net Income – Yum China Holdings, Inc. $ 244 $ 215 $ 553 $ 507
Adjusted Diluted Earnings Per Common Share $ 0.70 $ 0.58 $ 1.57 $ 1.35
Adjusted Effective Tax Rate 26.0 % 25.8 % 26.6 % 26.9 %
Adjusted EBITDA $ 482 $ 427 $ 1,050 $ 941
(a)Represents the period-over-period change in percentage.
(b)See “Non-GAAP Measures” below for definitions and reconciliations of the most directly comparable GAAP financial measures to the non-GAAP measures.
Performance Metrics
Quarter Ended 6/30/2026 Year to Date Ended 6/30/2026
% change % change
System Sales Growth 13 % 11 %
System Sales Growth, excluding F/X 6 % 5 %
Same-Store Sales Growth 1 % 1 %
Unit Count 6/30/2026 6/30/2025 % Increase
Company-owned 15,776 14,319 10
Franchisees 3,521 2,659 32
19,297 16,978 14
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Non-GAAP Measures
In addition to the results provided in accordance with GAAP throughout this MD&A, the Company provides the following non-GAAP measures:
•Measures adjusted for Special Items, which include Adjusted Operating Profit, Adjusted Net Income, Adjusted Earnings Per Common Share (“EPS”), Adjusted Effective Tax Rate and Adjusted EBITDA;
•Company Restaurant Profit (“Restaurant profit”) and Restaurant margin;
•Core Operating Profit and Core OP margin, which exclude Special Items, and further adjusted for Items Affecting Comparability and the impact of F/X;
These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these non-GAAP measures provides additional information to investors to facilitate the comparison of past and present results, excluding those items that the Company does not believe are indicative of our core operations.
With respect to non-GAAP measures adjusted for Special Items, the Company excludes impact from Special Items for the purpose of evaluating performance internally and uses them as factors in determining compensation for certain employees. Special Items are not included in any of our segment results.
Adjusted EBITDA is defined as net income including noncontrolling interests adjusted for equity in net earnings (losses) from equity method investments, income tax, interest income, net, investment gain or loss, depreciation and amortization, store impairment charges, and Special Items. Store impairment charges included as an adjustment item in Adjusted EBITDA primarily resulted from our semi-annual impairment evaluation of long-lived assets of individual restaurants, and additional impairment evaluation whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. If these restaurant-level assets were not impaired, depreciation of the assets would have been recorded and included in EBITDA. Therefore, store impairment charges were a non-cash item similar to depreciation and amortization of our long-lived assets of restaurants. The Company believes that investors and analysts may find it useful in measuring operating performance without regard to such non-cash items.
Restaurant profit is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales, including cost of food and paper, restaurant-level payroll and employee benefits, rent, depreciation and amortization of restaurant-level assets, advertising expenses, and other operating expenses. Company restaurant margin percentage is defined as Restaurant profit divided by Company sales. We also use Restaurant profit and Restaurant margin for the purpose of internally evaluating the performance of our Company-owned restaurants and we believe they provide useful information to investors as to the profitability of our Company-owned restaurants.
Core Operating Profit is defined as Operating Profit adjusted for Special Items, and further excluding Items Affecting Comparability and the impact of F/X. We consider quantitative and qualitative factors in assessing whether to adjust for the impact of items that may be significant or that could affect an understanding of our ongoing financial and business performance or trends. Items such as charges, gains and accounting changes, which are viewed by management as significantly impacting the current period or the comparable period, due to changes in policy or other external factors, or non-cash items pertaining to underlying activities that are different from or unrelated to our core operations, are generally considered “Items Affecting Comparability.” Examples of Items Affecting Comparability include, but are not limited to: temporary relief from landlords and government agencies; VAT deductions due to tax policy changes; and amortization of reacquired franchise rights recognized upon acquisitions. We believe presenting Core Operating Profit provides additional information to further enhance comparability of our operating results and we use this measure for purposes of evaluating the performance of our core operations. Core OP margin is defined as Core Operating Profit divided by Total revenues, excluding the impact of F/X.
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The following table sets forth the reconciliations of the most directly comparable GAAP financial measures to the non-GAAP financial measures:
Quarter Ended Year to Date Ended
6/30/2026 6/30/2025 6/30/2026 6/30/2025
Reconciliation of Operating Profit to Adjusted Operating Profit
Operating Profit $ 348 $ 304 $ 795 $ 703
Special Items, Operating Profit — — — —
Adjusted Operating Profit $ 348 $ 304 $ 795 $ 703
Reconciliation of Net Income to Adjusted Net Income
Net Income – Yum China Holdings, Inc. $ 244 $ 215 $ 553 $ 507
Special Items, Net Income –Yum China Holdings, Inc. — — — —
Adjusted Net Income – Yum China Holdings, Inc. $ 244 $ 215 $ 553 $ 507
Reconciliation of EPS to Adjusted EPS
Basic Earnings Per Common Share $ 0.70 $ 0.58 $ 1.58 $ 1.36
Special Items, Basic Earnings Per Common Share — — — —
Adjusted Basic Earnings Per Common Share $ 0.70 $ 0.58 $ 1.58 $ 1.36
Diluted Earnings Per Common Share $ 0.70 $ 0.58 $ 1.57 $ 1.35
Special Items, Diluted Earnings Per Common Share — — — —
Adjusted Diluted Earnings Per Common Share $ 0.70 $ 0.58 $ 1.57 $ 1.35
Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate
Effective tax rate 26.0 % 25.8 % 26.6 % 26.9 %
Impact on effective tax rate as a result of Special Items — — — —
Adjusted effective tax rate 26.0 % 25.8 % 26.6 % 26.9 %
Net income, along with the reconciliation to Adjusted EBITDA, is presented below:
Quarter Ended Year to Date Ended
6/30/2026 6/30/2025 6/30/2026 6/30/2025
Net Income – Yum China Holdings, Inc. $ 244 $ 215 $ 553 $ 507
Net income – noncontrolling interests 20 18 42 39
Equity in net (earnings) losses from equity method investments (2 ) (2 ) (4 ) (6 )
Income tax provision 92 80 215 199
Interest income, net (12 ) (25 ) (28 ) (51 )
Investment loss 6 18 17 15
Operating Profit 348 304 795 703
Special Items, Operating Profit — — — —
Adjusted Operating Profit 348 304 795 703
Depreciation and amortization 120 110 237 219
Store impairment charges 14 13 18 19
Adjusted EBITDA $ 482 $ 427 $ 1,050 $ 941
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Reconciliation of GAAP Operating Profit to Restaurant Profit is as follows:
Quarter Ended 6/30/2026
KFC Pizza Hut All Other Segments Corporate and Unallocated Elimination Total
GAAP Operating Profit (Loss) $ 332 $ 51 $ (1 ) $ (34 ) $ — $ 348
Less:
Franchise fees and income 24 3 2 — — 29
Revenues from transactions with franchisees 19 3 25 108 — 155
Other revenues 1 3 235 25 (220 ) 44
Add:
General and administrative expenses 67 28 8 36 — 139
Franchise expenses 10 2 — — — 12
Expenses for transactions with franchisees 15 2 23 108 — 148
Other operating costs and expenses 1 3 231 23 (220 ) 38
Closures and impairment expenses, net 10 1 1 — — 12
Restaurant profit $ 391 $ 78 $ — $ — $ — $ 469
Company sales 2,294 604 12 — — 2,910
Restaurant margin (%) 17.1 % 12.9 % (2.3 )% N/A N/A 16.1 %
Quarter Ended 6/30/2025
KFC Pizza Hut All Other Segments Corporate and Unallocated Elimination Total
GAAP Operating Profit (Loss) $ 292 $ 46 $ (1 ) $ (33 ) $ — $ 304
Less:
Franchise fees and income 19 2 3 — — 24
Revenues from transactions with franchisees 17 1 17 80 — 115
Other revenues 1 6 172 17 (161 ) 35
Add:
General and administrative expenses 61 26 8 36 — 131
Franchise expenses 9 1 — — — 10
Expenses for transactions with franchisees 15 1 16 78 — 110
Other operating costs and expenses 1 5 168 17 (161 ) 30
Closures and impairment expenses, net 8 3 1 — — 12
Other income, net — — — (1 ) — (1 )
Restaurant profit $ 349 $ 73 $ — $ — $ — $ 422
Company sales 2,059 545 9 — — 2,613
Restaurant margin (%) 16.9 % 13.3 % (11.5 )% N/A N/A 16.1 %
Year to Date Ended 6/30/2026
KFC Pizza Hut All Other Segments Corporate and Unallocated Elimination Total
GAAP Operating Profit (Loss) $ 749 $ 122 $ — $ (76 ) $ — $ 795
Less:
Franchise fees and income 47 6 6 — — 59
Revenues from transactions with franchisees 38 5 51 217 — 311
Other revenues 2 6 483 47 (456 ) 82
Add:
General and administrative expenses 128 54 14 80 — 276
Franchise expenses 21 3 — — — 24
Expenses for transactions with franchisees 30 4 48 216 — 298
Other operating costs and expenses 1 5 474 44 (455 ) 69
Closures and impairment expenses, net 10 1 1 — — 12
Restaurant profit (loss) $ 852 $ 172 $ (3 ) $ — $ 1 $ 1,022
Company sales 4,704 1,231 22 — — 5,957
Restaurant margin (%) 18.1 % 14.0 % (8.2 )% N/A N/A 17.2 %
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Year to Date Ended 6/30/2025
KFC Pizza Hut All Other Segments Corporate and Unallocated Elimination Total
GAAP Operating Profit (Loss) $ 678 $ 106 $ (3 ) $ (78 ) $ — $ 703
Less:
Franchise fees and income 40 4 7 — — 51
Revenues from transactions with franchisees 33 3 36 164 — 236
Other revenues 2 13 342 34 (324 ) 67
Add:
General and administrative expenses 120 52 16 81 — 269
Franchise expenses 19 2 — — — 21
Expenses for transactions with franchisees 29 3 33 162 — 227
Other operating costs and expenses 2 11 335 34 (323 ) 59
Closures and impairment expenses, net 13 3 2 — — 18
Other income, net — — — (1 ) — (1 )
Restaurant profit (loss) $ 786 $ 157 $ (2 ) $ — $ 1 $ 942
Company sales 4,267 1,129 18 — — 5,414
Restaurant margin (%) 18.4 % 13.9 % (16.0 )% N/A N/A 17.4 %
Reconciliation of GAAP Operating Profit to Core Operating Profit is as follows:
Quarter ended % Change Year to Date Ended % Change
6/30/2026 6/30/2025 B/(W) 6/30/2026 6/30/2025 B/(W)
Operating profit $ 348 $ 304 14 $ 795 $ 703 13
Special Items, Operating Profit — — — —
Adjusted Operating Profit $ 348 $ 304 14 $ 795 $ 703 13
Items Affecting Comparability — — — —
F/X impact (20 ) — (44 ) —
Core Operating Profit $ 328 $ 304 7 $ 751 $ 703 7
Total revenues 3,138 2,787 13 6,409 5,768 11
F/X impact (183 ) — (342 ) —
Total revenues, excluding the impact of F/X $ 2,955 $ 2,787 6 $ 6,067 $ 5,768 5
Core OP margin (%) 11.1 % 10.9 % 0.2 ppts. 12.4 % 12.2 % 0.2 ppts.
Reconciliation of GAAP Operating Profit to Core Operating Profit by segment is as follows:
Quarter Ended 6/30/2026
KFC Pizza Hut All Other Segments Corporate and Unallocated Elimination Total
GAAP Operating Profit (Loss) $ 332 $ 51 $ (1 ) $ (34 ) $ — $ 348
Special Items, Operating Profit — — — — — —
Adjusted Operating Profit (Loss) $ 332 $ 51 $ (1 ) $ (34 ) $ — $ 348
Items Affecting Comparability — — — — — —
F/X impact (19 ) (3 ) — 2 — (20 )
Core Operating Profit (Loss) $ 313 $ 48 $ (1 ) $ (32 ) $ — $ 328
Quarter Ended 6/30/2025
KFC Pizza Hut All Other Segments Corporate and Unallocated Elimination Total
GAAP Operating Profit (Loss) $ 292 $ 46 $ (1 ) $ (33 ) $ — $ 304
Special Items, Operating Profit — — — — — —
Adjusted Operating Profit (Loss) $ 292 $ 46 $ (1 ) $ (33 ) $ — $ 304
Items Affecting Comparability — — — — — —
F/X impact — — — — — —
Core Operating Profit (Loss) $ 292 $ 46 $ (1 ) $ (33 ) $ — $ 304
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Year to Date Ended 6/30/2026
KFC Pizza Hut All Other Segments Corporate and Unallocated Elimination Total
GAAP Operating Profit (Loss) $ 749 $ 122 $ — $ (76 ) $ — $ 795
Special Items, Operating Profit — — — — — —
Adjusted Operating Profit (Loss) $ 749 $ 122 $ — $ (76 ) $ — $ 795
Items Affecting Comparability — — — — — —
F/X impact (40 ) (7 ) — 3 — (44 )
Core Operating Profit (Loss) $ 709 $ 115 $ — $ (73 ) $ — $ 751
Year to Date Ended 6/30/2025
KFC Pizza Hut All Other Segments Corporate and Unallocated Elimination Total
GAAP Operating Profit (Loss) $ 678 $ 106 $ (3 ) $ (78 ) $ — $ 703
Special Items, Operating Profit — — — — — —
Adjusted Operating Profit (Loss) $ 678 $ 106 $ (3 ) $ (78 ) $ — $ 703
Items Affecting Comparability — — — — — —
F/X impact — — — — — —
Core Operating Profit (Loss) $ 678 $ 106 $ (3 ) $ (78 ) $ — $ 703
Segment Results
KFC
Quarter Ended Year to Date Ended
% B/(W) % B/(W)
6/30/2026 6/30/2025 Reported Ex F/X 6/30/2026 6/30/2025 Reported Ex F/X
Company sales $ 2,294 $ 2,059 11 5 $ 4,704 $ 4,267 10 4
Franchise fees and income 24 19 23 16 47 40 20 13
Revenues from transactions with franchisees 19 17 18 11 38 33 16 10
Other revenues 1 1 (5 ) (11 ) 2 2 (4 ) (9 )
Total revenues $ 2,338 $ 2,096 12 5 $ 4,791 $ 4,342 10 4
Company restaurant expenses $ 1,903 $ 1,710 (11 ) (5 ) $ 3,852 $ 3,481 (11 ) (5 )
G&A expenses $ 67 $ 61 (9 ) (3 ) $ 128 $ 120 (6 ) (1 )
Franchise expenses $ 10 $ 9 (22 ) (15 ) $ 21 $ 19 (18 ) (11 )
Expenses for transactions with franchisees $ 15 $ 15 (3 ) 3 $ 30 $ 29 (4 ) 1
Other operating costs and expenses $ 1 $ 1 53 55 $ 1 $ 2 58 60
Closures and impairment expenses, net $ 10 $ 8 (30 ) (23 ) $ 10 $ 13 27 31
Operating Profit $ 332 $ 292 14 7 $ 749 $ 678 10 5
OP Margin (%) 14.2 % 14.0 % 0.2 ppts. 0.2 ppts. 15.6 % 15.6 % — ppts. — ppts.
Restaurant profit $ 391 $ 349 12 6 $ 852 $ 786 8 3
Restaurant margin (%) 17.1 % 16.9 % 0.2 ppts. 0.2 ppts. 18.1 % 18.4 % (0.3 ) ppts. (0.3 ) ppts.
Quarter Ended 6/30/2026 Year to Date Ended 6/30/2026
% change % change
System Sales Growth 13 % 12 %
System Sales Growth, excluding F/X 7 % 6 %
Same-Store Sales Growth 1 % 1 %
Unit Count 6/30/2026 6/30/2025 % Increase
Company-owned 11,500 10,536 9
Franchisees 2,289 1,702 34
13,789 12,238 13
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Company Sales and Restaurant Profit
The changes in Company sales and Restaurant profit were as follows:
Quarter Ended
Income (Expense) 6/30/2025 Store Portfolio Actions Other F/X 6/30/2026
Company sales $ 2,059 $ 86 $ 16 $ 133 $ 2,294
Cost of sales (631 ) (30 ) (8 ) (41 ) (710 )
Cost of labor (556 ) (26 ) (12 ) (36 ) (630 )
Occupancy and other operating expenses (523 ) (18 ) 11 (33 ) (563 )
Restaurant profit $ 349 $ 12 $ 7 $ 23 $ 391
Year to Date Ended
Income (Expense) 6/30/2025 Store Portfolio Actions Other F/X 6/30/2026
Company sales $ 4,267 $ 152 $ 33 $ 252 $ 4,704
Cost of sales (1,316 ) (53 ) (9 ) (78 ) (1,456 )
Cost of labor (1,110 ) (47 ) (48 ) (68 ) (1,273 )
Occupancy and other operating expenses (1,055 ) (35 ) 27 (60 ) (1,123 )
Restaurant profit $ 786 $ 17 $ 3 $ 46 $ 852
The increase in Company sales for the quarter and year to date ended June 30, 2026, excluding the impact of F/X, was primarily driven by net unit growth and same-store sales growth. The increase in Restaurant profit for the quarter and year to date ended June 30, 2026, excluding the impact of F/X, was primarily driven by the increase in Company sales, efficiency improvement from streamlined operations and favorable commodity prices, partially offset by increased rider cost associated with higher delivery sales mix in the current period and value-for-money offerings.
Franchise Fees and Income/Revenues from Transactions with Franchisees
The quarter and year to date increase in Franchise fees and income and Revenues from transactions with franchisees, excluding the impact of F/X, was primarily driven by acceleration of franchise store openings.
Operating Profit
The quarter and year to date increase in Operating profit, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit.
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Pizza Hut
Quarter Ended Year to Date Ended
% B/(W) % B/(W)
6/30/2026 6/30/2025 Reported Ex F/X 6/30/2026 6/30/2025 Reported Ex F/X
Company sales $ 604 $ 545 11 4 $ 1,231 $ 1,129 9 3
Franchise fees and income 3 2 47 38 6 4 41 34
Revenues from transactions with franchisees 3 1 52 44 5 3 44 36
Other revenues 3 6 (41 ) (44 ) 6 13 (51 ) (54 )
Total revenues $ 613 $ 554 11 4 $ 1,248 $ 1,149 9 3
Company restaurant expenses $ 526 $ 472 (11 ) (5 ) $ 1,059 $ 972 (9 ) (3 )
G&A expenses $ 28 $ 26 (11 ) (5 ) $ 54 $ 52 (6 ) 0
Franchise expenses $ 2 $ 1 (43 ) (35 ) $ 3 $ 2 (37 ) (30 )
Expenses for transactions with franchisees $ 2 $ 1 (37 ) (29 ) $ 4 $ 3 (25 ) (18 )
Other operating costs and expenses $ 3 $ 5 41 45 $ 5 $ 11 53 56
Closures and impairment expenses, net $ 1 $ 3 52 54 $ 1 $ 3 56 58
Operating Profit $ 51 $ 46 11 5 $ 122 $ 106 15 9
OP Margin (%) 8.3 % 8.3 % — ppts. 0.1 ppts. 9.8 % 9.2 % 0.6 ppts. 0.6 ppts.
Restaurant profit $ 78 $ 73 8 2 $ 172 $ 157 10 4
Restaurant margin (%) 12.9 % 13.3 % (0.4 ) ppts. (0.4 ) ppts. 14.0 % 13.9 % 0.1 ppts. 0.1 ppts.
Quarter Ended 6/30/2026 Year to Date Ended 6/30/2026
% change % change
System Sales Growth 13 % 11 %
System Sales Growth, excluding F/X 6 % 5 %
Same-Store Sales Growth 1 % Even
Unit Count 6/30/2026 6/30/2025 % Increase
Company-owned 4,036 3,629 11
Franchisees 513 235 118
4,549 3,864 18
Company Sales and Restaurant Profit
The changes in Company sales and Restaurant profit were as follows:
Quarter Ended
Income (Expense) 6/30/2025 Store Portfolio Actions Other F/X 6/30/2026
Company sales $ 545 $ 21 $ 3 $ 35 $ 604
Cost of sales (177 ) (7 ) (8 ) (12 ) (204 )
Cost of labor (154 ) (6 ) (1 ) (10 ) (171 )
Occupancy and other operating expenses (141 ) (5 ) 4 (9 ) (151 )
Restaurant profit $ 73 $ 3 $ (2 ) $ 4 $ 78
Year to Date Ended
Income (Expense) 6/30/2025 Store Portfolio Actions Other F/X 6/30/2026
Company sales $ 1,129 $ 36 $ — $ 66 $ 1,231
Cost of sales (363 ) (12 ) (20 ) (22 ) (417 )
Cost of labor (317 ) (9 ) 6 (19 ) (339 )
Occupancy and other operating expenses (292 ) (10 ) 15 (16 ) (303 )
Restaurant profit $ 157 $ 5 $ 1 $ 9 $ 172
As compared to the second quarter of 2025, the increase in Company sales for the quarter, excluding the impact of F/X, was primarily driven by net unit growth and same-store sales growth. The increase in Restaurant profit for the quarter, excluding the impact of F/X, was primarily driven by the increase in Company sales, efficiency improvement from streamlined operations and favorable commodity prices, partially offset by increased delivery cost associated with higher delivery sales mix in the current period and value-for-money offerings.
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The increase in Company sales for the year to date ended June 30, 2026, excluding the impact of F/X, was primarily driven by net unit growth. The year to date increase in Restaurant profit, excluding the impact of F/X, was primarily driven by the increase in Company sales, efficiency improvement from streamlined operations and favorable commodity prices, partially offset by value-for-money offerings and increased delivery cost associated with higher delivery sales mix in the current period.
Franchise Fees and Income/Revenues from Transactions with Franchisees
The quarter and year to date increase in Franchise fees and income and Revenues from transactions with franchisees, excluding the impact of F/X, was primarily driven by acceleration of franchise store openings.
Operating Profit
The quarter and year to date increase in Operating profit, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit and lower closures and impairment expenses.
All Other Segments
All Other Segments reflects the results of Lavazza, Huang Ji Huang, Little Sheep, Taco Bell and our delivery operating segment.
Quarter Ended Year to Date Ended
% B/(W) % B/(W)
6/30/2026 6/30/2025 Reported Ex F/X 6/30/2026 6/30/2025 Reported Ex F/X
Company sales $ 12 $ 9 28 21 $ 22 $ 18 26 19
Franchise fees and income 2 3 (25 ) (30 ) 6 7 (25 ) (29 )
Revenues from transactions with franchisees 25 17 46 38 51 36 43 35
Other revenues 235 172 37 29 483 342 41 33
Total revenues $ 274 $ 201 36 28 $ 562 $ 403 39 32
Company restaurant expenses $ 12 $ 9 (17 ) (11 ) $ 25 $ 20 (17 ) (11 )
G&A expenses $ 8 $ 8 1 7 $ 14 $ 16 11 15
Expenses for transactions with franchisees $ 23 $ 16 (47 ) (39 ) $ 48 $ 33 (46 ) (39 )
Other operating costs and expenses $ 231 $ 168 (37 ) (29 ) $ 474 $ 335 (41 ) (34 )
Closures and impairment expenses, net $ 1 $ 1 3 8 $ 1 $ 2 32 35
Operating Profit (Loss) $ (1 ) $ (1 ) 80 81 $ — $ (3 ) NM NM
OP Margin (%) (0.1 )% (0.8 )% 0.7 ppts. 0.7 ppts. — (0.8 )% 0.8 ppts. 0.8 ppts.
Restaurant profit (loss) $ — $ — 74 80 $ (3 ) $ (2 ) 35 41
Restaurant margin (%) (2.3 )% (11.5 )% 9.2 ppts. 9.2 ppts. (8.2 )% (16.0 )% 7.8 ppts. 7.8 ppts.
Total Revenues
The quarter and year to date increase in Total revenues of All other segments, excluding the impact of F/X, was primarily driven by revenue generated by our delivery team for services provided to Company-owned restaurants, which is inter-segment revenue, and franchise restaurants as a result of increased delivery sales.
Operating Profit (Loss)
The quarter and year to date improvement in Operating profit (loss) excluding the impact of F/X, was primarily driven by the decrease in Operating loss from certain emerging brands.
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Corporate and Unallocated
Quarter Ended Year to Date Ended
% B/(W) % B/(W)
6/30/2026 6/30/2025 Reported Ex F/X 6/30/2026 6/30/2025 Reported Ex F/X
Revenues from transactions with franchisees $ 108 $ 80 37 29 $ 217 $ 164 32 25
Other revenues $ 25 $ 17 43 34 $ 47 $ 34 38 31
Expenses for transactions with franchisees $ 108 $ 78 (39 ) (31 ) $ 216 $ 162 (33 ) (26 )
Other operating costs and expenses $ 23 $ 17 (40 ) (32 ) $ 44 $ 34 (33 ) (26 )
Corporate G&A expenses $ 36 $ 36 (2 ) 1 $ 80 $ 81 — 3
Other unallocated income, net $ — $ (1 ) (99 ) (100 ) $ — $ (1 ) (67 ) (71 )
Interest income, net $ 12 $ 25 (52 ) (52 ) $ 28 $ 51 (48 ) (49 )
Investment loss $ (6 ) $ (18 ) 65 65 $ (17 ) $ (15 ) (6 ) (6 )
Income tax provision (See Note 12) $ (92 ) $ (80 ) (14 ) (9 ) $ (215 ) $ (199 ) (8 ) (2 )
Equity in net earnings (losses) from equity method investments $ 2 $ 2 23 16 $ 4 $ 6 (15 ) (20 )
Effective tax rate (See Note 12) 26.0 % 25.8 % (0.2 ) ppts. (0.2 ) ppts. 26.6 % 26.9 % 0.3 ppts. 0.3 ppts.
Revenues from Transactions with Franchisees
Revenues from transactions with franchisees primarily include revenues derived from the Company’s central procurement model, whereby food and paper products are centrally purchased and then mainly sold to KFC and Pizza Hut franchisees. The quarter and year to date increase in revenues from transactions with franchisees, excluding the impact of F/X, was mainly due to the increase in system sales for franchisees primarily driven by acceleration of franchise store openings.
Corporate G&A Expenses
Corporate G&A expenses for the quarter remained flat. The year to date decrease in Corporate G&A expenses, excluding the impact of F/X, was primarily due to lower compensation costs and timing of government subsidies.
Interest Income, Net
The quarter and year to date decrease in interest income, net, excluding the impact of F/X, was primarily driven by lower investment balance with cash used in return to shareholders and lower interest rates.
Investment Loss
The investment loss mainly relates to the change in fair value of our investment in Meituan. See Note 3 for additional information.
Income Tax Provision
Our income tax provision primarily includes tax on our earnings generally at the Chinese statutory tax rate of 25% with certain Chinese subsidiaries qualified for preferential tax rates, withholding tax on planned or actual repatriation of earnings outside of China, Hong Kong profits tax, and U.S. corporate income tax, if any. The higher effective tax rate for the quarter ended June 30, 2026 was primarily due to higher U.S. tax impact. The lower effective tax rate for the year to date ended June 30, 2026 was primarily due to higher excess tax benefits upon exercise of share-based awards.
Significant Known Events, Trends or Uncertainties Expected to Impact Future Results
Tax Examination on Transfer Pricing
We are subject to reviews, examinations and audits by Chinese tax authorities, the Internal Revenue Service and other tax authorities with respect to income and non-income based taxes. Since 2016, we have been under a national audit on transfer pricing by the STA in China regarding our related party transactions for the period from 2006 to 2015. The information and views currently exchanged with the tax authorities focus on our franchise arrangement with YUM. We continue to provide information requested by the tax authorities to the extent it is available to the Company. It is reasonably possible that there could be significant developments, including expert review and assessment by the STA, within the next 12 months. The ultimate assessment and decision of the STA will depend upon further review of the information provided, as well as ongoing technical and other discussions with the STA and in-charge local tax authorities, and therefore it is not possible to reasonably estimate the potential impact at this time. We will continue to defend our transfer pricing position. However, if the STA prevails in the assessment of additional tax due based on its ruling, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations and cash flows.
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PRC Value-Added Tax (“VAT”)
Effective May 1, 2016, a 6% output VAT replaced the 5% business tax (“BT”) previously applied to certain restaurant sales. Input VAT would be creditable to the aforementioned 6% output VAT. Our new retail business is generally subject to VAT rates at 9% or 13%. The latest VAT rates imposed on our purchase of materials and services mainly included 13%, 9% and 6%, which were gradually changed from 17%, 13%, 11% and 6% since 2017. These rate changes impact our input VAT on all materials and certain services, mainly including construction, transportation and leasing. However, the impact on our operating results was insignificant.
Entities that are general VAT taxpayers are permitted to offset qualified input VAT paid to suppliers against their output VAT upon receipt of appropriate supplier VAT invoices on an entity-by-entity basis. When the output VAT exceeds the input VAT, the difference is remitted to tax authorities, usually on a monthly basis; whereas when the input VAT exceeds the output VAT, the difference is treated as a VAT asset which can be carried forward indefinitely to offset future net VAT payables. VAT related to purchases and sales which have not been settled at the balance sheet date is disclosed separately as an asset and liability, respectively, in the Condensed Consolidated Balance Sheets. At each balance sheet date, the Company reviews the outstanding balance of any VAT asset for recoverability, giving consideration to the indefinite life of VAT assets as well as its forecasted operating results and capital spending, which inherently includes significant assumptions that are subject to change. As of June 30, 2026 and December 31, 2025, the Company has not made an allowance for the recoverability of VAT assets, as the balance is expected to be utilized to offset against VAT payables or be refunded in the future.
In June 2022, the Chinese Ministry of Finance (“MOF”) and the STA jointly issued Announcement [2022] No. 21, to extend full VAT credit refunds to more sectors and increase the frequency for accepting taxpayers’ applications. Beginning on July 1, 2022, entities engaged in providing catering services in China are allowed to apply for a lump sum refund of VAT assets accumulated prior to March 31, 2019. In addition, VAT assets accumulated after March 31, 2019 can be refunded on a monthly basis. In August 2025, the MOF and the STA jointly issued Announcement [2025] No. 7, amending the VAT refund policy. Effective September 1, 2025, certain industries (including the catering sector) are only eligible for a partial refund of VAT assets, subject to additional criteria stipulated in the announcement.
As of June 30, 2026, current VAT assets of $159 million, non-current VAT assets of $14 million and net VAT payable of $7 million were recorded in Prepaid expenses and other current assets, Other assets and Accounts payable and other current liabilities, respectively, in the Condensed Consolidated Balance Sheets.
The Company will continue to review the classification of VAT assets at each balance sheet date, giving consideration to different local implementation practices of refunding VAT assets and the outcome of potential administrative reviews.
We have been benefiting from the retail tax structure reform since it was implemented on May 1, 2016. However, the amount of our expected benefit from this VAT regime depends on a number of factors, some of which are outside of our control. The interpretation and application of the new VAT regime are not settled at some local governmental levels. On December 25, 2024, China enacted the VAT Law, which came into effect on January 1, 2026, along with its implementation rules. In terms of tax rates, the VAT Law maintains the existing standard rates of 13%, 9% and 6%. We will continue to monitor regulatory developments and evaluate any potential impact on our financial statements.
Foreign Currency Exchange Rate
The reporting currency of the Company is the US$. Most of the revenues, costs, assets and liabilities of the Company are denominated in Chinese Renminbi (“RMB”). Any significant change in the exchange rate between US$ and RMB may materially affect the Company’s business, results of operations, cash flows and financial condition, depending on the weakening or strengthening of RMB against the US$. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for further discussion.
Condensed Consolidated Cash Flows
Our cash flows for the years to date ended June 30, 2026 and 2025 were as follows:
Net cash provided by operating activities was $976 million in 2026 as compared to $864 million in 2025. The increase was primarily driven by the increase in Operating profit along with working capital changes.
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Net cash used in investing activities was $265 million in 2026 as compared to $290 million in 2025. The decrease was mainly due to the net impact on cash flows resulting from purchases and maturities of short-term investments, and long-term bank deposits and notes.
Net cash used in financing activities was $739 million in 2026 as compared to $709 million in 2025. The increase was primarily driven by the increase of share repurchases and cash dividends paid on common stock, partially offset by the increase in the proceeds from short-term borrowings.
Liquidity and Capital Resources
Historically we have funded our operations through cash generated from the operation of our Company-owned stores and our franchise operations. Our global offering in September 2020 provided us with $2.2 billion in net proceeds.
Our ability to fund our future operations and capital needs will primarily depend on our ongoing ability to generate cash from operations. We believe our principal uses of cash in the future will be primarily to fund our operations and capital expenditures for accelerating store network expansion and store remodeling, to step up investments in digitalization, automation and logistics infrastructure, to provide returns to our stockholders, as well as to explore opportunities for investments that build and support our ecosystem or strategic acquisitions. We believe that our future cash from operations, together with our funds on hand and access to the capital markets, will provide adequate resources to fund these uses of cash, and that our existing cash, net cash from operations and credit facilities will be sufficient to fund our operations and anticipated capital expenditures for the next 12 months. We currently expect our fiscal year 2026 capital expenditures to be in the range of approximately $600 million to $700 million.
In August 2026, the Company completed the acquisition of ownership of the Pizza Hut brand in Mainland China at a cash consideration of $1.2 billion. To finance the transaction, the Company secured an approximately $1.2 billion equivalent offshore bridge loan for up to twelve months.
For long term financing, the Company is evaluating a range of options. The timing and terms of any such financing will depend on market conditions and other factors. Our access to, and the availability of, financing on acceptable terms and conditions in the future or at all will be impacted by many factors, including, but not limited to:
•our financial performance;
•our credit ratings;
•the liquidity of the overall capital markets and our access to capital markets; and
•the state of the Chinese, U.S. and global economies, as well as relations between the Chinese and U.S. governments.
There can be no assurance that we will have access to the capital markets on terms acceptable to us or at all.
Generally, our income is subject to the Chinese statutory tax rate of 25%. However, to the extent our cash flows from operations exceed our China cash requirements, the excess cash may be subject to an additional 10% withholding tax levied by the Chinese tax authority, subject to any reduction or exemption set forth in relevant tax treaties or tax arrangements.
Share Repurchases and Dividends
As of June 30, 2026, our Board of Directors authorized an aggregate of $5.4 billion for our share repurchase program, of which $641 million remained available as of June 30, 2026. Yum China may repurchase shares under this program from time to time in the open market or, subject to applicable regulatory requirements, through privately negotiated transactions, block trades, accelerated share repurchase transactions and the use of Rule 10b5-1 trading plans. During the years to date ended June 30, 2026 and 2025, the Company repurchased 10.7 million shares of common stock for $515 million and 7.7 million shares of common stock for $356 million, respectively, under the repurchase program, excluding transaction costs and excise tax.
For the quarters ended June 30, 2026 and 2025, the Company paid cash dividends of approximately $101 million and $90 million, respectively, and for the years to date ended June 30, 2026 and 2025, the Company paid aggregate cash dividends of approximately $203 million and $180 million, respectively, to stockholders through a quarterly dividend payment of $0.29 and $0.24 per share, respectively.
The Company plans to return $1.5 billion to shareholders in 2026, adding to the $1.5 billion it delivered to shareholders in each of 2025 and 2024 in share repurchases and dividends.
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On July 30, 2026, the Board of Directors declared a cash dividend of $0.29 per share, payable on September 17, 2026, to stockholders of record as of the close of business on August 27, 2026. The total estimated cash dividend payable is approximately $99 million.
The Company plans to return an average annual return of approximately $900 million to over $1 billion in 2027 and 2028, and to exceed $1 billion in 2028.
Our plan of capital returns to shareholders is based on current expectations, which may change based on market conditions, capital needs or otherwise. Our ability to return capital to shareholders in the future is also subject to the factors described below under “Forward-Looking Statements.” In addition, our ability to declare and pay any dividends on our stock may be restricted by our earnings available for distribution under applicable Chinese laws. The laws, rules and regulations applicable to our Chinese subsidiaries permit payments of dividends only out of their accumulated profits, if any, determined in accordance with applicable Chinese accounting standards and regulations. Under Chinese laws, an enterprise incorporated in China is required to set aside at least 10% of its after-tax profits each year, after making up previous years’ accumulated losses, if any, to fund statutory surplus reserve, until the aggregate amount of such a fund reaches 50% of its registered capital. As a result, our Chinese subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends. At the discretion of the board of directors, as an enterprise incorporated in China, each of our Chinese subsidiaries may allocate a portion of its after-tax profits based on Chinese accounting standards to discretionary surplus reserve. These reserves are not distributable as cash dividends.
Borrowing Capacity
As of June 30, 2026, the Company had credit facilities of RMB10,715 million (approximately $1,579 million), comprised of onshore credit facilities in the aggregate amount of RMB8,000 million (approximately $1,179 million), offshore credit facilities in the aggregate amount of $200 million and a credit facility of $200 million that can be used for either onshore or offshore.
The credit facilities had remaining terms ranging from less than one year to three years as of June 30, 2026. Our credit facilities mainly include term loans, overdrafts, letters of credit, banker’s acceptance notes and bank guarantees. The credit facilities in general bear interest based on the Loan Prime Rate (“LPR”) published by the National Interbank Funding Centre of the PRC, or Secured Overnight Financing Rate (“SOFR”) published by the Federal Reserve Bank of New York. Each credit facility contains a cross-default provision whereby our failure to make any payment on a principal amount from any credit facility will constitute a default on other credit facilities. Some of the credit facilities contain covenants limiting, among other things, certain additional indebtedness and liens, and certain other transactions specified in the respective agreements. As of June 30, 2026, we had outstanding short-term bank borrowings of RMB445 million (approximately $66 million), mainly to manage working capital at our operating subsidiaries. Such bank borrowings are due within one year from their issuance dates. As of June 30, 2026, we also had outstanding bank guarantees of RMB315 million (approximately $46 million) mainly to secure our lease payments to landlords for certain Company-owned restaurants, as well as outstanding bank guarantees of RMB600 million (approximately $89 million) to secure the balance of prepaid stored-value cards issued by the Company pursuant to regulatory requirements. Our credit facilities were therefore reduced by outstanding short-term bank borrowings, adjusted for unamortized interest and outstanding guarantees. As of June 30, 2026, the Company had unused credit facilities of approximately $1,378 million.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
See Note 2 for details of recently adopted accounting pronouncements.
New Accounting Pronouncements Not Yet Adopted
In November 2024, the FASB issued ASU 2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40) (“ASU 2024-03”), requiring public business entities to disclose in the notes to the financial statements, among other things, specific information about certain costs and expenses including purchases of inventory, employee compensation, depreciation, amortization and depletion expenses for each caption on the income statement where such expenses are included. ASU 2024-03 is effective for the Company for annual period from January 1, 2027, and for interim periods from January 1, 2028, with early adoption permitted. We are currently evaluating the impact the adoption of this standard may have on our financial statements.
In September 2025, the FASB issued Accounting Standards Update 2025-06, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Targeted Improvements to the Accounting for Internal-Use Software (“ASU 2025-06”), which better aligns the accounting guidance to how software is developed by eliminating project stages from capitalization criteria, and further clarifies the threshold entities apply to begin capitalizing costs. The amendment also enhances the disclosure requirements for internal-use software. ASU 2025-06 is effective for the Company from January 1, 2028, with early adoption permitted. We are currently evaluating the impact the adoption of this standard may have on our financial statements.
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In December 2025, the FASB issued ASU 2025-10, Government Grants (Topic 832): Accounting for Government Grants Received by Business Entities (“ASU 2025-10”) to establish guidance on the recognition, measurement, and presentation of government grants received by business entities. The new standard leverages the principles in the accounting framework for government assistance in International Accounting Standard 20. ASU 2025-10 is effective for the Company for annual period from January 1, 2029, with early adoption permitted. We are currently evaluating the impact the adoption of this standard may have on our financial statements.
Cautionary Note Regarding Forward-Looking Statements
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. These statements often include words such as “may,” “will,” “estimate,” “intend,” “seek,” “expect,” “project,” “anticipate,” “believe,” “plan,” “could,” “target,” “aim,” “commit,” “predict,” “likely,” “should,” “forecast,” “outlook,” “model,” “continue,” “ongoing” or other similar terminology. Forward-looking statements are based on our expectations, estimates, assumptions or projections concerning future results or events as of the date of the filing of this Form 10-Q. Our plan of capital returns to shareholders is based on current expectations, which may change based on market conditions, capital needs or otherwise. Forward-looking statements are neither predictions nor guarantees of future events, circumstances or performance and are inherently subject to known and unknown risks, uncertainties and assumptions that could cause our actual results and events to differ materially from those indicated by those statements. We cannot assure you that any of our assumptions are correct or any of our expectations, estimates or projections will be achieved. Numerous factors could cause our actual results to differ materially from those expressed or implied by forward-looking statements, including, without limitation, the following:
•Risks related to our business and industry, such as (a) food safety and foodborne illness concerns, (b) significant failure to maintain effective quality assurance systems for our restaurants, (c) significant liability claims, food contamination complaints from our customers or reports of incidents of food tampering, (d) health concerns arising from outbreaks of viruses or other illnesses, (e) the fact that the operation of our restaurants is subject to the terms of the master license agreement with YUM, (f) the fact that substantially all of our revenue is derived from our operations in China, (g) the fact that our success is tied to the success of YUM’s brand strength, marketing campaigns and product innovation, (h) shortages or interruptions in the availability and delivery of food products and other supplies, (i) fluctuation of raw materials prices, (j) our inability to attain our target development goals, the potential cannibalization of existing sales by aggressive development and the possibility that new restaurants will not be profitable, (k) risks associated with leasing real estate, (l) inability to obtain desirable restaurant locations on commercially reasonable terms, (m) labor shortages or increases in labor costs, (n) the fact that our success depends substantially on our corporate reputation and on the value and perception of our brands, (o) challenges and risks related to our franchise development, (p) failures or interruptions of service or security breaches in our information technology systems, (q) the occurrence of security breaches and cyber-attacks, (r) failure to protect the integrity and security of our customer or employee personal, financial or other data or our proprietary or confidential information that is stored in our information systems or by third parties on our behalf, (s) the fact that our business depends on the performance of, and our long-term relationships with, third-party mobile payment processors, internet infrastructure operators, internet service providers, delivery aggregators and third-party e-commerce platforms, (t) failure to provide timely and reliable delivery services by our restaurants and the continued increase in delivery sales mix, (u) our growth strategy with respect to our coffee business may not be successful, (v) the anticipated benefits of our acquisitions may not be realized in a timely manner or at all, (w) challenges and risks related to our new retail business, (x) use of GenAI technologies, (y) our inability or failure to recognize, respond to and effectively manage the impact of social media, (z) failure to comply with anti-bribery or anti-corruption laws, (aa) U.S. federal income taxes, changes in tax rates, disagreements with tax authorities and imposition of new taxes, (bb) changes in consumer discretionary spending and general economic conditions, (cc) the fact that the restaurant industry in which we operate is highly competitive, (dd) loss of or failure to obtain or renew any or all of the approvals, licenses and permits to operate our business, (ee) our inability to adequately protect the intellectual property we own or have the right to use, (ff) our licensor’s failure to protect its intellectual property, (gg) seasonality and certain major events in China, (hh) our failure to detect, deter and prevent all instances of fraud or other misconduct committed by our employees, customers or other third parties, (ii) the fact that our success depends on the continuing efforts of our key management and experienced and capable personnel as well as our ability to recruit new talent, (jj) our strategic investments or acquisitions may be unsuccessful; (kk) our investment in technology and innovation may not generate the expected level of returns, (ll) fluctuation of changes for our equity investments measured at fair value, lower yields of our short-term investments or lower returns of our future long-term bank deposits and notes may adversely affect our financial results, and (mm) our operating results or net income may be adversely affected by our investment in equity method investees;
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•Risks related to doing business in China, such as (a) changes in Chinese political policies and economic and social policies or conditions, (b) the interpretation and enforcement of Chinese laws, rules and regulations may change from time to time with little advance notice, and the risk that the PRC government may intervene or influence our operations, which could result in a material change in our operations and/or the value of our securities to decline, (c) audit reports included in our annual reports prepared by auditors who are located in China, and in the event the PCAOB is unable to inspect our auditors, our common stock will be subject to potential delisting from the New York Stock Exchange, (d) changes in political, business, economic and trade relations between the United States and China, (e) fluctuation in the value of the Chinese Renminbi, (f) the fact that we face increasing focus and evolving requirements on environmental sustainability issues, (g) limitation on our ability to utilize our cash balances effectively, including making funds held by our China-based subsidiaries unavailable for use outside of mainland China, due to interventions in or the imposition of restrictions and limitations by the PRC government on currency conversion and payments of foreign currency and RMB out of mainland China, (h) changes in the laws and regulations of China or noncompliance with applicable laws and regulations, (i) reliance on dividends and other distributions on equity paid by our principal subsidiaries in China to fund offshore cash requirements, and uncertainties regarding the application of the withholding tax rates could have a material adverse effect on our business and financial results, (j) potential unfavorable tax consequences resulting from our classification as a China resident enterprise for Chinese enterprise income tax purposes, (k) uncertainty regarding indirect transfers of equity interests in China resident enterprises and enhanced scrutiny by Chinese tax authorities, (l) difficulties in effecting service of legal process, conducting investigations, collecting evidence, enforcing foreign judgments or bringing original actions in China against us, (m) the Chinese government may determine that the variable interest entity structure of Daojia does not comply with Chinese laws on foreign investment in restricted industries, (n) inability to use properties due to defects caused by non-registration of lease agreements related to certain properties, (o) risk in relation to unexpected land acquisitions, building closures or demolitions, (p) potential fines and other legal or administrative sanctions for failure to comply with Chinese regulations regarding our employee equity incentive plans and various employee benefit plans, (q) proceedings instituted by the SEC against certain China-based accounting firms, including our independent registered public accounting firm, could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act, (r) restrictions on our ability to make loans or additional capital contributions to our Chinese subsidiaries due to Chinese regulation of loans to, and direct investment in, Chinese entities by offshore holding companies and governmental administration of currency conversion, (s) difficulties in pursuing growth through acquisitions due to regulations regarding acquisitions, and (t) the PRC government has significant oversight and discretion to exert supervision over offerings of securities conducted outside of China and over foreign investment in China-based issuers, and may limit or completely hinder our ability to offer securities to investors, or cause the value of our securities to significantly decline;
•Risks related to the separation and related transactions, such as (a) incurring significant tax liabilities if the distribution does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes and the Company could be required to indemnify YUM for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement, (b) being obligated to indemnify YUM for material taxes and related amounts pursuant to indemnification obligations under the tax matters agreement if YUM is subject to Chinese indirect transfer tax with respect to the distribution, (c) potential indemnification liabilities owing to YUM pursuant to the separation and distribution agreement, (d) the indemnity provided by YUM to us with respect to certain liabilities in connection with the separation may be insufficient to insure us against the full amount of such liabilities, (e) the possibility that a court would require that we assume responsibility for obligations allocated to YUM under the separation and distribution agreement, and (f) potential liabilities due to fraudulent transfer considerations; and
•General risks, such as (a) potential legal proceedings, (b) changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters, (c) failure of our insurance policies to provide adequate coverage for claims associated with our business operations, (d) unforeseeable business interruptions, and (e) failure by us to maintain effective disclosure controls and procedures and internal control over financial reporting in accordance with the rules of the SEC.
In addition, other risks and uncertainties not presently known to us or that we currently believe to be immaterial could affect the accuracy of any such forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. You should consult our filings with the SEC (including the information set forth under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025) for additional information regarding factors that could affect our financial and other results. You should not place undue reliance on forward-looking statements, which speak only as of the date of the filing of this Form 10-Q. We are not undertaking to update any of these statements, except as required by law.
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