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Yum China (YUMC) Stock Takes a Hit Despite Q2 Earnings Beat

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Yum China Holdings, Inc. (YUMC - Free Report) reported second-quarter 2020 results, wherein earnings and revenues surpassed the Zacks Consensus Estimate. While the bottom line beat the consensus mark for the 11th straight quarter, the top line outpaced the same for the third straight quarter.

Despite reporting better-than-expected results, the company’s shares declined 5.3% in after-hour trading session yesterday. Investor sentiment was hurt by soft June sales after witnessing sequential improvement in the months of April and May. Sales in the reported quarter were impacted by dismal traffic.

Adjusted earnings of 35 cents beat the Zacks Consensus Estimate of 23 cents. However, the reported figure declined 24% from the year-ago quarter. Excluding gains from equity investment in Meituan in 2020 and 2019, earnings declined 34% year over year.

Detailed Revenue Discussion

The company’s total revenues of $1,902 million surpassed the consensus mark of $1,883 million. However, the figure fell 11% year over year. Excluding foreign currency translation, the top line decreased 7% on a year-over-year basis.

Total system sales in the reported quarter fell 4% from the year-ago period owing to decline in system sales of 6% at KFC and 12% at Pizza Hut. Also, same-store sales slumped 11% year over year, primarily owing to a decline of 10% at KFC and 12% at Pizza Hut.

Yum China Holdings Inc. Price, Consensus and EPS Surprise Yum China Holdings Inc. Price, Consensus and EPS Surprise

Yum China Holdings Inc. price-consensus-eps-surprise-chart | Yum China Holdings Inc. Quote

Operating Highlights

In the second quarter, total costs and expenses contracted 8% year over year to $1,774 million, compared with $1,920 million in the year-ago quarter. This improvement was backed by a 8% decrease in food and paper costs, 15% decline in payroll and employee-benefit costs and an 11% drop in company restaurant expenses.

Restaurant margin in the quarter under review was 13.7%, reflecting a decline of 100-basis points from the year-ago period. The decline was primarily led by dismal same-store performance, value promotions, combined with wage and commodity inflation. However, this was partially offset by relief provided by landlords and government agencies.

Adjusted operating profit totaled $132 million, down 35% from the year-ago quarter. Adjusted net income declined to $136 million from $178 million in the prior-year period.

Balance Sheet

Cash and cash equivalents as of Jun 30, 2020, summed $674 million compared with $1,046 million as on Dec 31, 2019. Inventories in the second quarter were $346 million compared with $380 million at 2019-end.

Unit Development and Other Details

In the second quarter, Yum China opened 169 new restaurants and remodeled 31. The company’s delivery contributed nearly 27% to KFC's company sales and 35% to Pizza Hut's company sales, up from approximately 18% and 24% from the prior-year period, respectively.

Digital orders in the first quarter accounted for 86% of sales at KFC (up 24 percentage points year over year) and 61% of sales in Pizza Hut (32).

As of Jun 30, 2020, both KFC and Pizza Hut loyalty programs comprised more than 265 million members. In the second quarter, KFC member sales accounted for nearly 65% of KFC's system sales, while Pizza Hut member sales contributed approximately 53% to Pizza Hut's system sales.

2020 Outlook

The company has reiterated the following fiscal 2020 targets. Yum China expects store count in the range of 800-850 in 2020. Capital expenditure is projected between $500 million and $550 million.

The company has been undertaking numerous measures to protect employees, customers and business partners amid the pandemic. However, it has stated that coronavirus is expected to have an adverse material impact on its operating and financial results for 2020.

Zacks Rank & Key Picks

Yum China, which shares space with McDonald's Corporation (MCD - Free Report) , carries a Zacks Rank #3 (Hold).

Some better-ranked stocks worth considering in the same space include Domino's Pizza, Inc. (DPZ - Free Report) and Dine Brands Global, Inc. (DIN - Free Report) . Both the stocks carry the Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Domino's Pizza has an impressive long-term earnings growth rate of 13.9%.

Dine Brands Global beat estimates in three of the trailing four quarters and missed on one occasion, the average surprise being 9.2%.

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