Yum China (YUMC) Down 25% in a Year: What's Hurting the Stock?
Shares of Yum China Holdings, Inc. YUMC have declined 25.2% in the past year against the industry’s 9.1% rise. Inflationary pressures and soft consumer demand primarily caused the downside.
This Zacks Rank #5 (Strong Sell) company reported third-quarter 2023 results, with earnings missing the Zacks Consensus Estimate. The company posted adjusted earnings per share (EPS) of 59 cents, missing the Zacks Consensus Estimate of 66 cents. In the year-ago quarter, YUMC reported an adjusted EPS of 49 cents.
In the past 60 days, earnings estimates for 2024 have gone down 12.4% to $2.18 per share. Let’s discuss the factors hurting the company’s performance.
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Primary Concerns
Yum China’s performance is affected by commodity and wage inflation and a challenging macro environment.
In the third quarter of 2023, total costs and expenses reached $2,591 million, up 9.4% from $2,369 million reported in the previous-year quarter. The cost of sales, as a percentage of total revenues, rose to 31.1%, a 40-basis points (bps) increase year over year, driven by intensified promotional activities (to boost sales traffic) and higher poultry prices. Labor costs climbed to 25.3%, up by 180 basis points compared with the previous year’s levels.
Restaurant margins for the company dropped by 180 bps year over year to 17% during the quarter. The downside was caused by the conclusion of austerity measures and a temporary easing experienced in the prior year.
Yum China foresees continued uncertainty in the macroeconomic landscape, potential wage inflation in upcoming quarters, the comparison to temporary relief measures from the previous year and the potential phasing out of VAT deductions.
While strategic price adjustments have been employed to counter inflationary costs, the company expects these pressures to persist in the short term. Projections for the fourth quarter of 2023 indicate an expected mid-single-digit wage inflation and a return to more standard staffing levels in their stores.
The post-pandemic economic recovery seems to follow a fluctuating and non-linear path. Nevertheless, the company maintains a cautious approach and remains dedicated to meticulously monitoring sales performance metrics and enhancing cost efficiency.
Key Picks
Some better-ranked stocks in the Retail-Wholesale sector include:
Arcos Dorados Holdings Inc. ARCO sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 28.3% on average. Shares of ARCO have surged 55.9% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for ARCO’s 2024 sales and earnings per share (EPS) indicates 10.6% and 15.5% growth, respectively, from the year-ago period’s levels.
Brinker International, Inc. EAT sports a Zacks Rank #1. It has a trailing four-quarter earnings surprise of 223.6%, on average. Shares of EAT have increased 38.9% in the past year.
The Zacks Consensus Estimate for EAT’s 2024 sales and EPS indicates 5.1% and 26.2% growth, respectively, from the year-ago period’s levels.
Wingstop Inc. WING sports a Zacks Rank #1. It has a trailing four-quarter earnings surprise of 28.9%, on average. The stock has gained 83.6% in the past year.
The Zacks Consensus Estimate for Wingstop’s 2024 sales and EPS suggests rises of 15.8% and 18.2%, respectively, from the year-ago period’s levels.
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