Yum China Turns in Mixed Numbers on Possibly Its Last Earnings Call — The Motley Fool

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It’s been a news-heavy week for Yum China (NYSE:YUMC), the unique licensee of KFC, Pizza Hut, and Taco Bell in the world’s most populous nation. Less than two years after splitting from former father or mother Yum! Brands, Chinese funding agency Hillhouse Capital is seemingly in acquiring the fast food chain.

A couple of days after that headline broke, Yum China reported a blended bag of outcomes from its second quarter 2018. If Hillhouse pulls the set off, this might be the final quarterly report traders get.

The quarter’s numbers

Metric

Q2 2018

Q2 2017

YOY Increase

Revenue

$2.07 billion

$1.84 billion

12%

Operating bills

$1.88 billion

$1.67 billion

12%

Earnings per share

$zero.36

$zero.31

16%

KFC same-store gross sales enhance (lower)

zero%

four%

N/A

Pizza Hut same-store gross sales enhance (lower)

(four%)

zero%

N/A

Chart by creator. Data supply: Yum China quarterly earnings.

Yum China’s top and bottom-line numbers looked pretty good, but same-store sales weakness weighed down results. Because of flat performance at KFC’s existing stores and another drop at Pizza Hut, average restaurant profit margins fell to 15.1% compared with 16.6% in 2017. Management said consumer spending in China has softened as of late, so increased promotional activity was necessary. Paired with aggressive deals from competitors, foot traffic in stores suffered.

To be fair, Yum China was firing on all cylinders last year, so lapping those strong numbers was going to be difficult. CEO Joey Wat also reminded investors that while same-store sales is an important driver of profit margins, the primary goal is growing the total number of restaurant locations in the developing Chinese market.

A close-up shot of a plate of fried chicken strips.

Image source: Getty Images.

On that front, Yum China has now opened 365 new locations in 2018 through the end of the second quarter, bringing its total store count to 8,198. That’s a better than 6% increase from the year prior, and don’t expect that expansion to slow down. The chain thinks that the country can eventually support 20,000 KFC and Pizza Hut stores. Plus, Yum recoups its funding into a brand new construct on a pretax foundation in as few as two to a few years. Thus, though same-store gross sales had been a drag, Yum nonetheless grew at a good clip due to its aggressive push for extra eating places.

What occurs subsequent?

As for different goings-on on the firm, increasing digital and supply initiatives are nonetheless priorities. Investing in technological capabilities is a vital approach Yum is managing the excessive single-digit development in wages in China.

Those investments proceed to yield outcomes, with supply throughout the corporate rising by double digits once more. KFC rewards members are up 50% 12 months over 12 months to 135 million, and KFC deliveries are up 33%. Pizza Hut rewards members are up 20% 12 months over 12 months to 45 million, and supply is up 18%.

Part of the unique motive Yum China gained independence from Yum! Brands was to have extra flexibility in tailoring its menus to its distinctive market. That can also be an ongoing challenge, particularly at Pizza Hut, the place rekindling shopper curiosity stays elusive. A brand new retailer idea just lately opened in Shanghai to raise the model’s picture — as a result of Pizza Hut is upscale in China. At KFC, breakfast, espresso, and dessert have been focused as key development drivers. KFC launched a glowing espresso in the second quarter and expanded its ice cream menu.

The interior of the new Shanghai Pizza Hut. Chairs and walls are in neutral white with soft neutral brown accents and modern lighting.

The inside of the brand new Shanghai Pizza Hut. Image supply: Yum China.

Yum China’s second quarter was blended, however that is okay. The firm continues to make progress on its most vital initiatives and is sustaining its standing as China’s largest restaurant chain. Details relating to a possible buyout are nonetheless forthcoming, however for now, traders can chalk up this report as a win for the corporate because it tries to greatest final 12 months’s blowout numbers.

Nicholas Rossolillo and his shoppers personal shares of Yum China Holdings, Inc. The Motley Fool has no place in any of the shares talked about. The Motley Fool has a disclosure policy.



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