Yum China (YUMC) Up 1% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Yum China Holdings (YUMC). Shares have added about 1% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Yum China Q4 Earnings & Revenues Surpass Estimates

Yum China Holdings reported fourth-quarter 2019 results, wherein earnings and revenues surpassed the respective Zacks Consensus Estimate by 66.7% and 0.3%. The bottom line surpassed the consensus estimate for the ninth straight quarter, whereas revenues topped expectations in two of the trailing six quarters.

Adjusted earnings of 25 cents surpassed the Zacks Consensus Estimate of 15 cents. The reported figure also increased 108.3% from the year-ago quarter. Considering the mark to market gain or loss from the company’s equity investment in Meituan Dianping in 2019 and 2018, earnings remained flat year over year.

Yum China gained from accelerated store openings and robust performance of KFC. During the reported quarter, the company achieved the 13th consecutive system sales growth, led by solid momentum at KFC.

Detailed Revenue Discussion

The company’s total revenues of $2.03 billion topped the consensus mark of $2.02 billion and grew 6% year over year. Excluding foreign currency translation, the top line increased 8% on a year-over-year basis.
Total system sales in the reported quarter improved 8% from the year-ago period, owing to system sales growth of 10% at KFC and 1% at Pizza Hut. Also, same-store sales grew 2% year over year, primarily owing to a 3% rise at KFC. The same at Pizza Hut remained flat with the prior-year figure.

Operating Highlights

In the fourth quarter, total costs and expenses increased 6% year over year to $1,935 million. This upside was due to a 19% increase in general and administrative expenses, 6% rise in food and paper costs, 4% rise in payroll and employee-benefit costs, along with a 4% hike in company restaurant expenses.

Restaurant margin in the quarter under review was 12.4%, reflecting a 90-basis point increase from the year-ago period. This rise in restaurant margin was due to sales leverage, productivity improvement and other cost savings, partially offset by wage and commodity inflation and promotional activities.

Adjusted operating profit totaled $105 million, up 12% from the year-ago quarter. Adjusted net income increased to $98 million from $46 million in the prior-year period.

2019 Highlights

Adjusted earnings came in at $1.88 per share, reflecting an increase of 23% year over year. Revenues of $8.78 billion grew 4% from the year-ago quarter. Total system sales were up 9% from the prior-year quarter, led by 11% growth at KFC and 3% at Pizza Hut. Adjusted operating profit increased 7% from the year-ago period to $912 million.

Balance Sheet

Cash and cash equivalents as of Dec 31, 2019 summed $1,046 million compared with $1,266 million in the corresponding period 2018. Inventories at the end of 2019 were $380 million compared with $307 million at 2018-end.

In the quarter under review, the company’s board of directors announced a cash dividend payout of 12 cents per share on its common stock, payable on Mar 25, 2020 to its stockholders of record at the close of business as of Mar 4, 2020. Additionally, Yum China repurchased 1.3 million shares for $57.2 million.

Unit Development and Other Details

In the fourth quarter, Yum China opened 360 new restaurants and remodeled 416. The company’s delivery contributed 23% to sales in the fourth quarter, up 3 percentage points from the prior-year period. Delivery services expanded to 1,249 cities, up from 1,118 in the prior-year period. Digital orders accounted for 61% of sales in the quarter under review, marking an increase of 17 percentage points year over year.

As of Dec 31, 2019, the KFC loyalty program constituted more than 215 million members (up 35% year over year) and Pizza Hut loyalty program had in excess of 70 million members (up 33% year over year).

2020 Outlook

Yum China expects to reach its new store target of 800-850 for 2020. The company expects capital expenditure between $500 million and $550 million.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -131.03% due to these changes.

VGM Scores

Currently, Yum China has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. 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.