A month has gone by since the last earnings report for Yum China Holdings (YUMC). Shares have lost about 2.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Yum China due for a breakout? 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 drivers.
Yum China Q3 Earnings Surpass Estimates, Revenues Rise Y/Y
Yum China reported third-quarter 2024 results, with earnings beating the Zacks Consensus Estimate and revenues missing the same. That said, the top and bottom lines increased on a year-over-year basis.
YUMC’s Q3 Earnings & Revenue Discussion
Yum China reported adjusted earnings per share (EPS) of 77 cents, which beat the Zacks Consensus Estimate of 68 cents by 13.2%. The bottom line moved up 30.5% year over year.
Total revenues of $3.07 billion missed the consensus mark of $3.08 billion. On the other hand, the top line inched up 5.4% on a year-over-year basis. Excluding foreign currency translation, revenues increased 4% year over year.
Total system sales (excluding foreign currency translation) increased 4% year over year. The upside was attributable to the net new unit contribution of 7%. System sales at KFC and Pizza Hut increased 6% and 2% (excluding foreign currency translation) year over year, respectively. During the quarter, YUMC's same-store sales reached 97% of the previous year's level and same-store transactions grew 1% on a year-over-year basis.
Operating Highlights
During the third quarter, total costs and expenses amounted to $2.7 billion compared with $2.59 billion reported in the prior-year quarter. We projected the metric at $2.73 billion. The restaurant margin was 17% flat year over year. We estimated the metric at 18.4%. Adjusted operating profit totaled $371 million compared with $327 million a year ago. Our estimate for the metric was $332 million. Adjusted net income amounted to $297 million compared with $248 million reported in the prior-year quarter. Our estimate for the metric was $249.4 million.
Balance Sheet
As of Sept. 30, 2024, Yum China’s cash and cash equivalents were $1.19 billion compared with $1.13 billion as of Dec. 31, 2023. Net inventories were $359 million compared with $424 million as of Dec. 31, 2023.
As part of this expanded capital returns initiative, the company aims to return $1.5 billion to shareholders in 2024. During the first nine months, it delivered a record $1.24 billion in returns, including $1.06 billion through share buybacks and $187 million in cash dividends. In November 2024, Yum China’s board of directors approved an additional $1 billion for share repurchases, increasing total authorization to $4.4 billion. From 2017 to Nov. 1, 2024, YUMC repurchased around 71.8 million shares for $3 billion, leaving approximately $1.4 billion in remaining authorization.
Management declared a quarterly cash dividend of 16 cents per common share. The dividend will be payable on Dec. 17 to shareholders of record as of the close of business on Nov. 26, 2024.
Unit Development and Other Updates
In the third quarter, Yum China opened 438 net new stores. As of Sept. 30, the total restaurant count reached 15,861, including 11,283 KFC stores and 3,606 Pizza Hut stores. The company reported strategic expansion into underserved markets across China, enhancing customer access through tailored store models. Yum China is accelerating franchise store openings, focusing on strategic and remote locations, including lower-tier cities previously beyond reach. The company expects the franchise mix of net new stores to gradually increase to 40-50% for KFC and 20-30% for Pizza Hut over the next few years.
Yum China’s delivery contributed approximately 40% to KFC and Pizza Hut's company sales. Digital orders contributed about 90% to the total company sales. Loyalty programs of KFC and Pizza Hut led to year-over-year growth by increasing to more than 510 million members.
2024 Outlook
Yum China still projects net new store openings to be in the range of 1,500-1,700. Management continues to project capital expenditures to be between $700 million and $850 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision.
VGM Scores
At this time, Yum China has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of this revision has been net zero. It comes with little surprise Yum China has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
Performance of an Industry Player
Yum China belongs to the Zacks Retail - Restaurants industry. Another stock from the same industry, Cheesecake Factory (CAKE), has gained 7.2% over the past month. More than a month has passed since the company reported results for the quarter ended September 2024.
Cheesecake Factory reported revenues of $865.47 million in the last reported quarter, representing a year-over-year change of +4.3%. EPS of $0.58 for the same period compares with $0.39 a year ago.
For the current quarter, Cheesecake Factory is expected to post earnings of $0.91 per share, indicating a change of +13.8% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.2% over the last 30 days.
Cheesecake Factory has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of A.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
