Yum China (YUMC) Q3 Earnings Lag Estimates, Revenues Beat
Yum China Holdings, Inc. YUMC reported mixed third-quarter 2021 results. During the quarter, earnings missed the Zacks Consensus Estimate and declined on a year-over-year basis. Nevertheless, revenues beat the consensus mark and increased year over year.
During the quarter, the company’s operations were negatively impacted by the Delta variant outbreak in China. Major cities faced the brunt of lockdowns, leading to fewer social activities, substantially lower travel volume and canceled holiday trips. Dine-in volumes were significantly impacted by the same.
Per government statistics, the restaurant industry in China was considerably impacted in August with a revenue decline of approximately 10% from 2019 levels. An improvement was witnessed in September with revenue growth of approximately 2% from 2019 levels.
The company is focused on leveraging its member base and digital channels, launching food items and enhancing its hybrid delivery model to drive sales in the upcoming periods. As strict public health measures remain in effect nationwide, the company anticipates same-store sales recovery to take time.
Earnings & Revenue Discussion
Yum China Price, Consensus and EPS Surprise
Yum China price-consensus-eps-surprise-chart | Yum China Quote
During third-quarter 2021, the company reported adjusted diluted earnings of 22 cents. The figure missed the Zacks Consensus Estimate of 26 cents by 15.4%. The bottom line declined 66.7% from 66 cents reported in the year-ago quarter.
Quarterly revenues of $ 2,554 million beat the consensus mark of $2,518 million by 1.5%. The top line increased 8.8% on a year-over-year basis. Excluding foreign currency translation, the top line increased 2% year over year.
Total system sales in the reported quarter rose 1% year over year. System sales at both KFC and Pizza Hut moved up by 1%. However, same-store sales declined 7% year over year, primarily due to a fall of 8% at KFC and 5% at Pizza Hut.
Operating Highlights
During third-quarter 2021, total costs and expenses increased 33% year over year to $2,376 million compared with $1,792 million in the year-ago quarter. The upsurge can primarily be attributed to a 13% rise in food and paper costs, a 29% surge in payroll and employee benefits and a 15% rise in occupancy and other operating expenses.
Restaurant margin in the quarter under review was 12.2%, down 640 basis points from the year-ago quarter’s levels. The downside was primarily caused by sales deleveraging, stepped-up promotions, wage inflation and increased rider cost associated with rising delivery volume.
During the quarter, adjusted operating profit totaled $168 million, down 48% from the year-ago quarter’s levels. Adjusted net income amounted to $96 million compared with $263 million in the prior-year quarter.
Balance Sheet
As of Sep 30, 2021, cash and cash equivalents came in at 1,278 million compared with $1,209 million as of Jun 30, 2021. Inventories during the third quarter came in at $390 million compared with $380 million in the previous quarter.
During the third quarter, the company repurchased $33.6 million of stock at an average price of $58.56. As of Sep 30, the company had approximately $658 million available for the buyback program.
Meanwhile, the company declared a quarterly cash dividend of 12 cents per common share. The dividend will be payable on Dec 16, 2021, to shareholders of record as of Nov 24, 2021.
Unit Development and Other Updates
During third-quarter 2021, Yum China opened 524 new restaurants owing to the development of the KFC and Pizza Hut brands. As of Sep 30, the company’s total restaurant count stood at 11,415, up 1,265 stores year over year.
During the quarter under review, the company’s delivery contributed nearly 34% of KFC and Pizza Hut's company sales, up nearly six percentage points from the prior-year quarter.
Digital orders during the quarter accounted for 87% of KFC and Pizza Hut's company sales compared with 78% reported in the previous-year quarter. Loyalty programs of KFC and Pizza Hut led to year-over-year growth. During the third quarter, KFC and Pizza Hut loyalty programs increased to more than 350 million members.
2021 Outlook
Yum China expects to open approximately 1,700 new stores in 2021 compared with the prior estimate of 1,300 stores. The company anticipates solid expansion related to KFC and Pizza Hut stores. Capital expenditures in 2021 are anticipated at $700-800 million.
Zacks Rank & Key Picks
Yum China currently carries a Zacks Rank #5 (Strong Sell).
Some better-ranked stocks in the Zacks Retail - Restaurants industry space include Noodles & Company NDLS, Dave & Buster's Entertainment, Inc. PLAY and Papa John's International, Inc. PZZA, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Noodles & Company’s 2021 earnings are expected to surge 182.8%.
Dave & Buster's has a trailing four-quarter earnings surprise of 201.8%, on average.
Papa John's has three-five-year earnings per share growth rate of 15%.
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