Why Is Yum China (YUMC) Down 3.5% Since Last Earnings Report?
A month has gone by since the last earnings report for Yum China Holdings (YUMC). Shares have lost about 3.5% 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 the most recent earnings report in order to get a better handle on the important drivers.
Yum China Q3 Earnings and Revenue Miss Estimates
Yum China reported third-quarter 2023 results, with earnings and revenues missing the Zacks Consensus Estimate after beating in the preceding two quarters. Consumer demand weakened in late September through October, negatively impacting the company's quarterly results.
Earnings & Revenue Discussion
In third-quarter 2023, the company reported adjusted earnings of 59 cents per share, falling short of the Zacks Consensus Estimate of 66 cents by 10.6%. Yet, the bottom line surged 129% from 49 cents reported a year ago.
Quarterly revenues of $2,914 million lagged the consensus mark of $3,037 million. Nonetheless, the top line rose 9% on a year-over-year basis. Excluding foreign currency translation, revenues increased 15% year over year.
Total system sales grew 15% year over year. System sales at KFC and Pizza Hut jumped 15% and 13% (excluding foreign currency translation), respectively.
Same-store sales gained 4% year over year. The upside was primarily driven by 4% and 2% growth (excluding foreign currency translation) at KFC and Pizza Hut, respectively.
Operating Highlights
In third-quarter 2023, total costs and expenses amounted to $2,591 million, up 9% from $2,369 million in the prior-year quarter.
The restaurant margin was 17% compared with 18.8% a year ago. The downside was primarily due to a lapping of austerity measures as well as a temporary respite in the prior year.
Adjusted operating profit totaled $327 million compared with $318 million a year ago. Adjusted net income amounted to $248 million compared with $208 million in the prior-year quarter.
Balance Sheet
As of Sep 30, cash and cash equivalents were $1,131 million compared with $1,130 million as of Dec 31, 2022. Inventories were $419 million compared with $417 million in the previous quarter.
In the third quarter, YUMC repurchased nearly 2.9 million shares at an average price of $54.91 per share. As of Sep 30, the company had $870 million available for the buyback program.
Management declared a quarterly cash dividend of 13 cents per common share. The dividend will be payable on Dec 19 to shareholders of record as of Nov 28.
Unit Development and Other Updates
In third-quarter 2023, Yum China opened 500 net new stores for developing KFC and Pizza Hut brands. As of Sep 30, the total restaurant count reached 14,102.
In the quarter under review, Yum China’s delivery contributed nearly 35% to KFC and Pizza Hut's company sales.
Digital orders contributed 89% to KFC and Pizza Hut's company sales compared with 90% a year ago. Loyalty programs of KFC and Pizza Hut led to year-over-year growth by increasing to more than 460 million members.
2023 Outlook
Management now expects to open 1,400-1,600 net new stores, up from the prior estimate of 1,100-1,300. It anticipates solid expansion related to KFC and Pizza Hut stores along with growth of same-store sales. Capital expenditure in 2023 is projected to be $700-$900 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
The consensus estimate has shifted -57.47% due to these changes.
VGM Scores
At this time, Yum China has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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 broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Yum China has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
Performance of an Industry Player
Yum China belongs to the Zacks Retail - Restaurants industry. Another stock from the same industry, BJ's Restaurants (BJRI), has gained 15.6% over the past month. More than a month has passed since the company reported results for the quarter ended September 2023.
BJ's Restaurants reported revenues of $318.64 million in the last reported quarter, representing a year-over-year change of +2.3%. EPS of -$0.16 for the same period compares with -$0.25 a year ago.
BJ's Restaurants is expected to post earnings of $0.28 per share for the current quarter, representing a year-over-year change of +64.7%. Over the last 30 days, the Zacks Consensus Estimate has changed +2.1%.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for BJ's Restaurants. Also, the stock has a VGM Score of A.
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