Yum China's (YUMC) Q3 Earnings Surpass Estimates, Stock Up

Yum China Holdings, Inc. (NYSE:YUMC) reported mixed third-quarter 2018 results, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same. Adjusted earnings of 51 cents exceeded the Zacks Consensus Estimate of 44 cents. The reported figure also increased 19% from the year-ago quarter number, on higher revenues.

Following the quarterly results, shares of Yum China increased nearly 6% in after-hours trading. However, the stock has lost 25% in the past six months, against the industry’s 2% growth.

Detailed Revenue Discussion

Total revenues of $2,212 million lagged the consensus mark of $2,319 million but grew 4% year over year. Including foreign currency translation, the top line increased 6% on a year-over-year basis.

Total system sales in the quarter improved 4% from the year-ago quarter owing to system sales growth of 6% at KFC, partially offset by a 2% decline at Pizza Hut. However, total comps declined 1% primarily due to a 5% fall at Pizza Hut. Comps at KFC inched up 1% on a year-over-year basis.

Yum China Holdings Inc. Price, Consensus and EPS Surprise

Operating Highlights

In the third quarter, total costs and expenses increased 4% year over year to $1,943 million. The upside can be attributed to a 5% increase in restaurant expenses, a 7% rise in Payroll and employee benefits expenses, and a 9% hike in food and paper expenses.

Restaurant margin in the quarter was 17.6%, reflecting a 40 basis point (bps) decline from the year-ago quarter number. The fall in restaurant margin was due to investments in product upgrades, and promotions at both KFC and Pizza Hut, and its sales deleverage at Pizza Hut.

Adjusted operating profit totaled $269 million, up 3% from the year-ago quarter. Net income increased 15% to $203 million from $176 million in the prior-year period.

Balance Sheet

Cash and cash equivalents as of Sep 30, 2018 summed $1,334 million compared with $1,059 million as of Dec 31, 2017. Inventories at the end of the third quarter came in at $270 million compared with $297 million at the end of 2017.

In the quarter under review, the company’s board of directors declared a cash dividend of 12 cents per share on common stock, payable Dec 18, 2018 to its stockholders of record at the close of business on Nov 27, 2018. Additionally, Yum China repurchased 2.7 million shares for $93.7 million.

Unit Development and Other Details

In the third quarter, Yum China opened 195 new restaurants and remodeled 209 restaurants. The company’s online delivery contributed 17% to its sales, up from 3% registered in the prior-year quarter. Delivery services were expanded to 1,063 cities, up from 864 cities in the prior-year period. Mobile payment accounted for roughly 64% of the company’s sales in the reported quarter compared with 17% in the prior-year period.

As of Sep 30, 2018, the KFC loyalty program constituted more than 145 million members and the Pizza Hut loyalty program had in excess of 50 million members.

Yum China has a Zacks Rank #4 (Sell).

Stocks to Consider

Better-ranked stocks in the same space include Dunkin' Brands Group, Inc. (NASDAQ:DNKN) , Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) and Darden Restaurants, Inc. (NYSE:DRI) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dunkin' Brands Group has an impressive long-term earnings growth rate of 12.4%.

Dave & Buster's Entertainment delivered positive earnings surprise in each of the trailing four quarters, the average being 13.7%.

Darden Restaurants reported better-than-expected earnings over the preceding four quarters, the average being 5.1%.

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