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Yum China Puts Fast Food Worries Behind It

Nicholas Rossolillo, The Motley Fool

Shares of Yum China (NYSE: YUMC) -- the sole licensee of KFC, Pizza Hut, and Taco Bell in China -- are on a tear this year. As of this writing, the stock is up 37% so far in 2019 and approaching all-time high levels, thanks in large part to solid results during the first quarter.

The figures weren't all good, but it was welcome news overall after worry surfaced last year that China's taste for American-style fast food is waning. Those worries can be put to rest for now.

The quarterly numbers

Metric

Q1 2019

Q1 2018

% Change (YOY)

Revenue

$2.30 billion

$2.22 billion

4%

Operating expenses

$2.00 billion

$1.83 billion

10%

Earnings per share

$0.57

$0.72

(21%)

KFC restaurant margin

20.0%

20.9%

(9 bps)

Pizza Hut restaurant margin

14.3%

10.5%

380 bps

YOY = year over year. BPS = basis points. Data source: Yum China.

Yum China's total revenue rose 4% year over year, down from the 8% posted for full-year 2018. However, much of the slowdown was due to the U.S. dollar strengthening against the Chinese yuan during the quarter. Excluding currency exchange rates, revenue was up an impressive 10% from the year-ago period.

Besides 237 net new restaurant locations in operation (which brought the total to 8,653 at the end of the first quarter), existing same-store sales growth helped push the total higher. KFC locations notched a 5% same-store increase, and Pizza Hut returned to positive territory with a 1% gain. As a result of the better comps, average restaurant operating margin improved for Yum China to 18.5% from 17.9% in the first quarter of 2018.

Despite the positive momentum, bottom line earnings fell 21%. A strong dollar and other one-time items again weighed down results. Excluding those effects, earnings per share would have grown 8%. Not too shabby, although the rate is slower than the adjusted revenue increase because of inflating costs -- most notably chicken prices. Management expects poultry costs to continue rising all year, which will weigh on net profits.

Someone holding a smartphone. The screen is red with a white "order" button displayed.

Image source: Getty Images.

The fast food roadmap

Though the first quarter was a mixed bag, business overall started out on a positive foot. Yum China said it is still on track to open a total of 600 to 650 new stores this year, which should go a long way toward keeping overall sales up. KFC -- which makes up nearly three-quarters of the total store count -- remains a popular staple among Chinese consumers, but the positive comps at struggling Pizza Hut are good news. Yum China has been working to revamp the chain with store remodels and new menu items.

The company's growth strategy lies beyond just an expansion of the physical footprint. Yum China also continues to promote its loyalty membership program and apps, which enable online ordering, artificial intelligence-powered menu suggestions, and delivery. The company has amassed an impressive following. As of the end of last quarter, KFC had 175 million members in China (up 55 million year over year) and Pizza Hut 50 million (up 15 million).

A strong U.S. dollar did much to dent up what would have been a solid start to 2019, but operations at China's largest restaurant chain were still positive. Even with some challenges, Yum China continues to execute on its goal of opening 20,000 total stores in the world's most populous country.

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Nicholas Rossolillo and his clients own shares of Yum China Holdings, Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.