A month has gone by since the last earnings report for Yum China Holdings (YUMC). Shares have added about 9% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Yum China Q2 Earnings Beat, Revenues Miss Estimates
Yum China reported mixed second-quarter 2018 results, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same. Adjusted earnings of 36 cents surpassed the Zacks Consensus Estimate of 33 cents by 9.1%. The reported figure also increased 16% from the year-ago quarter number, on higher revenues.
Detailed Sales Discussion (Excluding Foreign Currency Translation)
Total revenues of $2,068 million missed the consensus mark of $2,092 million by 1.2% but grew 12% on a year-over-year basis.
Total system sales in the quarter increased 3% from the year-ago quarter, favored by system sales growth of 5% at KFC, partially offset by a 1% decline at Pizza Hut. However, total comps declined 1% primarily due to 4% fall at Pizza Hut. Comps at KFC were flat year-over-year.
In the second quarter, total costs and expenses increased 12% year over year to $1,875 million. The upside can be attributed to a 15% increase in restaurant expenses, a 16% rise in Payroll and employee benefits expenses and an 18% hike in food and paper expenses.
Restaurant margin in the quarter was 15.1%, reflecting a 150-basis point (bps) decline from the year-ago quarter. The fall in restaurant margin was due to the investment in product upgrades, and promotions at Pizza Hut and its sales deleverage.
Adjusted operating profit totaled $193 million, up 13% from the year-ago quarter. Net income increased 14% to $143 million from $125 million in the prior-year period.
Cash and cash equivalents as of Jun 30, 2018, summed $1,261 million compared with $1,059 million as of Dec 31, 2017. Inventories at the end of the second quarter came in at $276 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 10 cents per share on common stock, payable Sep 19, 2018, to its stockholders of record at the close of business on Aug 29, 2018. Additionally, Yum China repurchased 1.9 million shares for $73.4 million.
Unit Development and Other Details
In the second quarter, Yum China opened 164 new restaurants and remodeled 365 restaurants. The company’s online delivery contributed 16% to its sales, up from 3% recorded in the prior-year quarter. Delivery services were expanded to 1,000 cities, up from 800 cities in the prior-year period. Mobile payment accounted for roughly 63% of the company’s sales in the reported quarter compared with 21% in the prior-year period.
As of Jun 30, 2018, the KFC loyalty program constituted more than 135 million members and the Pizza Hut loyalty program had in excess of 45 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 -12.62% due to these changes.
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. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for growth investors than momentum investors.
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.
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