Yum China Holdings, Inc.YUMC has reported mixed fourth-quarter 2018 results, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same.
Adjusted earnings of 12 cents surpassed the Zacks Consensus Estimate of 7cents by 71.4%. The reported figure, however, decreased 14% from the year-ago quarter. If impact of the market loss on the company's equity investment in Meituan Dianping is taken into account, earnings fell 36.8% year over year.
The company gained from accelerated store openings and robust performance at KFC. Despite a decline in earnings, cost-saving initiatives by Yum China have been encouraging. Following the quarterly results, shares of Yum China increased nearly 2% in after-hours trading. However, the stock has gained 3.3% in the past six months compared with the industry 's 14.6% growth.
Detailed Revenue Discussion
Total revenues of $1,914 million lagged the consensus mark of $1,936 million but grew 2% year over year. Excluding foreign currency translation, the top line increased 7% on a year-over-year basis.
Total system sales in the reported quarter improved 6% from the year-ago quarter, owing to system sales growth of 9% at KFC, partially offset by a 2% decline at Pizza Hut. Also, total comps moved up 2%, primarily owing to 3% comps rise at KFC, partially offset by 4% decline in comps at Pizza Hut.
In the fourth quarter, total costs and expenses increased 0.3% year over year to $1,830 million. The upside can be attributed to a 3% increase in restaurant expenses, 3% rise in Payroll and employee benefits expenses, and a 9% hike in food and paper expenses.
Restaurant margin in the quarter under review was 11.5%, reflecting a 10-basis point (bps) decline from the year-ago quarter. The fall in restaurant margin was due to wage and commodity inflation, investments in product upgrades, and promotions at both KFC and Pizza Hut, partially offset by productivity improvement and other cost-saving initiatives.
Adjusted operating profit totaled $96 million, up from $47 million in the year-ago quarter. Net income increased to $74 million against net loss of $107 million in the prior-year period.
Yum China Holdings Inc. Price, Consensus and EPS Surprise
Cash and cash equivalents as of Dec 31, 2018, summed $1,266 million compared with $1,059 million as of Dec 31, 2017. Inventories at the end of the third quarter came in at $307 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 12 cents per share on common stock, payable on Mar 21, 2019, to stockholders of record at the close of business as of Feb 28, 2019. Additionally, Yum China repurchased 4.4 million shares for $145.3 million.
Unit Development and Other Details
In the fourth quarter, Yum China opened 257 restaurants and remodeled 232 restaurants. In 2018, the company opened 819 restaurants and remodeled 931 stores. Over 80% of Yum China's current portfolio has been remodeled or built over the past five years.
The company's online delivery contributed 19% to sales, up by 3 percentage points registered in the prior-year quarter. Delivery services were expanded to 1,188 cities, up from 900 cities in the prior-year period. Mobile payment accounted for roughly 65% of the company's sales in the reported quarter, marking an increase of 11 percentage points year over year. Digital payments accounted for 86% of sales in the quarter under review, an increase of 14 percentage points year over year.
As of Dec 31, 2018, the KFC loyalty program constituted more than 160 million members and the Pizza Hut loyalty program had in excess of 50 million members.
Yum China expects to open 600-650 gross new units in 2019, with capital expenditure between $450 million and $500 million at an effective tax rate below 28%.
Zacks Rank & Peer Releases
Yum China currently carries a Zacks Rank #4 (Sell).
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