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Why Is Yum China (YUMC) Down 18.6% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Yum China Holdings (YUMC). Shares have lost about 18.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Yum China due for a breakout? 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 Q1 Earnings & Revenues Beat Estimates

Yum China reported better-than-expected first-quarter 2019 results.

Adjusted earnings of 59 cents surpassed the Zacks Consensus Estimate of 53 cents by 11.3%. The reported figure also increased 11% from the year-ago quarter. The company gained from accelerated store openings and robust performance at KFC. Despite a decline in earnings, cost-saving initiatives by Yum China were encouraging.

Detailed Revenue Discussion

Total revenues of $2,304 million surpassed the consensus mark of $2,248 million and grew 4% year over year. Excluding foreign currency translation, the top line increased 10% on a year-over-year basis.

Total system sales in the reported quarter improved 9% from the year-ago quarter, owing to system sales growth of 11% at KFC, and 3% at Pizza Hut. Also, total comps moved up 4%, primarily owing to 5% comps rise at KFC, and 1% rise at Pizza Hut.

Operating Highlights

In the first quarter, total costs and expenses increased 10% year over year to $2,001 million. The upside can be attributed to a 3% increase in restaurant expenses, 5% rise in Payroll and employee benefits expenses, and a 7% hike in food and paper expenses.

Restaurant margin in the quarter under review was 18.5%, reflecting a 60-basis point (bps) increase from the year-ago quarter. Thisrise in restaurant margin was primarily attributable to sales leverage, improved utility efficiency and labor productivity, partially offset by commodity and wage inflations and increased promotional activities during the period.

Adjusted operating profit totaled $303 million, up from $297 million in the year-ago quarter. Net income decreased 23% to $222 million from $288 million in the prior-year period primarily due to the Wuxi re-measurement gain in the first quarter of 2018.

Balance Sheet

Cash and cash equivalents as of Mar 31, 2019, summed $1,247 million compared with $1,266 million as of Dec 31, 2018. Inventories at the end of the first quarter were $280 million compared with $307 million at the end of 2018.

In the quarter under review, the company’s board of directors declared a cash dividend of 12 cents per share on common stock, payable on Jun 17, 2019, to stockholders of record at the close of business as of May 28, 2019. Additionally, Yum China repurchased 1.7 million shares for $64.7 million.

Unit Development and Other Details

In the first quarter, Yum China opened 237 restaurants and remodeled 96 restaurants. The company’s online delivery contributed 19% to sales, up by 3 percentage points registered in the prior-year quarter. Delivery services were expanded to 1,160 cities, up from 972 cities in the prior-year period. Digital payments accounted for 87% of sales in the quarter under review, an increase of 13 percentage points year over year.

As of Mar 31, 2019, the KFC loyalty program constituted more than 175 million members and the Pizza Hut loyalty program had in excess of 55 million members.

2019 Outlook

Yum China expects to open 600-650 gross new units in 2019, with capital expenditure between $450 million and $500 million at an effective tax rate below 28%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Yum China has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile 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.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Yum China has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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