It has been about a month since the last earnings report for Yum China Holdings (YUMC). Shares have added about 1.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Yum China due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Yum China's Q3 Earnings Surpass Estimates
Yum China 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.
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.
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.
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.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.67% due to these changes.
Currently, Yum China has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Yum China has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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