Yum China (YUMC) Earnings & Revenues Beat Estimates in Q3

Yum China Holdings, Inc. YUMC reported third-quarter 2020 results, wherein earnings and revenues surpassed the Zacks Consensus Estimate. While the bottom line beat the consensus mark for the 12th straight quarter, the top line outpaced the same for the fourth straight quarter. However, following the quarterly results, the company’s share price did not show much movement.

Adjusted earnings of 66 cents beat the Zacks Consensus Estimate of 46 cents by 43.5%. Moreover, the reported figure increased 13.8% from the year-ago quarter (5% increase excluding gains from equity investment in Meituan in 2020 and 2019; 4% increase if further excluding F/X).

Detailed Revenue Discussion

Total revenues of $2,348 million surpassed the consensus mark of $2,258 million. Moreover, excluding foreign currency translation, the top line increased 1.3% on a year-over-year basis.

Total system sales in the reported quarter increased 1% year over year, while system sales at KFC and Pizza Hut fell 1% and 6%, respectively. Meanwhile, same-store sales declined 6% year over year, primarily owing to a decline of 6% at KFC and 7% at Pizza Hut.

Yum China Holdings Inc. Price, Consensus and EPS Surprise

Yum China Holdings Inc. price-consensus-eps-surprise-chart | Yum China Holdings Inc. Quote

Operating Highlights

In the third quarter, total costs and expenses contracted 11.2% year over year to $1,792 million, compared with $2,019 million in the year-ago quarter. This improvement was backed by a 2% decrease in occupancy and other operating costs and an 10.5% decline in franchise expenses.

Restaurant margin in the quarter under review was 18.6%, reflecting growth of 90 basis points from the year-ago period. The upside was primarily led by improved productivity and other store cost savings. However, this was partially offset by dismal same-store performance, value promotions and wage inflation.

Adjusted operating profit totaled $320 million, up 6.7% from the year-ago quarter. Adjusted net income came in at $263 million compared with $223 million in the prior-year period.

Balance Sheet

Cash and cash equivalents as of Sep 30, 2020, summed $1,782 million compared with $1,046 million as on Dec 31, 2019. Inventories in the third quarter were $346 million compared with $380 million at 2019-end.

The company’s board of directors announced a dividend of 12 cents per common share. The dividend is payable on Dec 16, 2020, to shareholders of record at the close of business as of Nov 25.

Unit Development and Other Details

In the third quarter, Yum China opened 312 new restaurants and remodeled 301. During the quarter, the company’s delivery contributed nearly 28% of KFC and Pizza Hut's company sales, up from 20% in the prior-year period.

Digital orders during the third quarter accounted for 78% of KFC and Pizza Hut's Company sales, compared with 56% in the previous-year quarter. Notably, loyalty programs and member sales of both KFC and Pizza Hut resulted in year-over-year growth.

2020 Outlook

Yum China primarily expects to open 900 new stores in 2020, compared to the previous range of 800-850 stores. The raised projection can be primarily attributed to rapid KFC store expansion along with the inclusion of new Huang Ji Huang stores. Capital expenditure is projected between $500 million and $550 million.

The company has been undertaking numerous measures to protect employees, customers and business partners amid the pandemic. However, it has stated that coronavirus is expected to have an adverse material impact on its operating and financial results for 2020.

Zacks Rank & Key Picks

Yum China currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include Brinker International, Inc. EAT Fiesta Restaurant Group, Inc. FRGI and Chuy's Holdings, Inc. CHUY. Brinker and Fiesta Restaurant sport a Zacks Rank #1, while Chuy's Holdings carries a Zacks Rank #2 (Buy).

Brinker has a three-five-year earnings per share growth rate of 12.7%.

Fiesta Restaurant’s 2021 earnings are expected to surge 260.7%.

Chuy's Holdings has a trailing four-quarter earnings surprise of 87.3%, on average.

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