Yum China (YUMC) Q3 Earnings Beat, Revenues Miss Estimates

Yum China Holdings, Inc. (NYSE:YUMC) reported mixed third-quarter 2019 results, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same. The bottom line surpassed the consensus estimate for the eighth straight quarter, whereas revenues lagged expectations in five out of the trailing six quarters.

Following the results, the company’s shares declined 3.3% in the after-hour trading session on Oct 29. However, shares of Yum China have gained 31.8% so far this year, outperforming the industry’s 17.5% rally.

Adjusted earnings of 58 cents surpassed the Zacks Consensus Estimate of 54 cents. The reported figure also increased 13.7% from the year-ago quarter. If the impact of market gains from the company’s equity investment in Meituan Dianping is taken into account, earnings rose 8% year over year.

Yum China gained from accelerated store openings and robust performance at KFC. During the reported quarter, the company achieved its 12th consecutive quarter of system sales growth for both KFC and Pizza Hut.

Detailed Revenue Discussion

The company’s total revenues of $2.32 billion lagged the consensus mark of $2.38 billion but grew 4.8% year over year. Excluding foreign currency translation, the top line increased 8% on a year-over-year basis.

Total system sales in the reported quarter improved 8% from the year-ago period, owing to system sales growth of 10% at KFC and 3% at Pizza Hut. Also, same-store sales grew 2% year over year, primarily owing to a 3% rise at KFC and 1% increase at Pizza Hut.

Operating Highlights

In the third quarter, total costs and expenses increased 3.9% year over year to $2,019 million. This upside was due to a 4.2% increase in restaurant expenses, 5.8% rise in Payroll and employee benefit costs, and a 6.7% hike in food and paper expenses.

Restaurant margin in the quarter under review was 17.7%, reflecting a 10-basis point increase from the year-ago period. This rise in restaurant margin was due to sales leverage, productivity improvement and other cost savings, partially offset by wage and commodity inflation and promotional activities.

Adjusted operating profit totaled $300 million, up from $269 million in the year-ago quarter. Adjusted net income increased to $223 million from $203 million in the prior-year period.

Balance Sheet

Cash and cash equivalents as of Sep 30, 2019 summed $1,355 million compared with $1,266 million on Dec 31, 2018. Inventories at the end of the third quarter were $317 million compared with $307 million at 2018-end.

In the quarter under review, the company’s board of directors declared cash dividend payout of 12 cents per share on its common stock, payable on Dec 17, 2019 to its stockholders of record at the close of business as of Nov 26, 2019. Additionally, Yum China repurchased 1.4 million shares for $64 million.

Unit Development and Other Details

In the third quarter, Yum China opened 231 new restaurants and remodeled 222 restaurants. The company’s online delivery contributed 20% to sales, up 3 percentage points from the prior-year quarter. Delivery services expanded to 1,225 cities, up from 1,063 in the prior-year period. Digital payments accounted for 91% of sales in the quarter under review, marking an increase of 9 percentage points year over year.

As of Sep 30, 2019, the KFC loyalty program constituted more than 200 million members and Pizza Hut loyalty program had in excess of 65 million members.

2019 Outlook

Yum China expects to reach the high end of its new store target of 800-850 for 2019. The company expects capital expenditure between $475 million and $525 million, at an effective tax rate below 28%.

Zacks Rank & Key Picks

Yum China currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks from the Restaurant space are Chuy's Holdings, Inc. (NASDAQ:CHUY) , Brinker International, Inc. (NYSE:EAT) and Dunkin' Brands Group, Inc. (NASDAQ:DNKN) . Chuy’s sports a Zacks Rank #1 (Strong Buy), while Brinker and Dunkin’ carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Chuy’s has an impressive long-term earnings growth rate of 17.5%.

Brinker surpassed the Zacks Consensus Estimate in three of the trailing four quarters, with an average positive earnings surprise of 4.4%.

Dunkin’ has an impressive long-term earnings growth rate of 9.8%.

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