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Yum China (YUMC) Rides on Unit Expansion & Robust Delivery

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Yum China Holdings, Inc. (YUMC - Free Report) is benefiting from robust digitalization, menu innovation and unit expansion plan. Notably, the company’s shares have gained 33.9% in the past six months, compared with the industry’s rally of 22.8%. However, traffic in the fourth quarter might get impacted by the social distancing trend.

Key Catalysts

Yum China holds a dominant position in the Chinese restaurant space with regards to delivery, mobile order and pay, and loyalty membership. The company is increasingly shifting toward digital and content marketing to expand customer base. It has adopted a high-grade delivery strategy that includes collaborating with aggregators to source traffic and fulfills orders by the company’s KFC riders. This is anticipated to aid the company in driving volume and leveraging the extensive network to control quality.

In third-quarter 2020, delivery contributed nearly 28% to KFC's and Pizza Hut's company sales, up from approximately 20% in the prior-year period. Digital orders during the third quarter accounted for 78% of KFC and Pizza Hut's Company sales, compared with 56% in the previous-year quarter.

Coming to loyalty membership, Yum Brands created a robust loyalty program that has more than 265 million loyalty members, combining both brands. Backed by delivery and digital sales, the company’s loyalty membership rose at a high-double digit year over year for both brands in 2018. As of Sep 30, 2020, both KFC and Pizza Hut loyalty programs comprised more than 285 million members. In the third quarter, KFC and Pizza Hut member sales accounted for nearly 60% system sales. During third-quarter 2020, the company sold 19 million privilege memberships at KFC and Pizza Hut.

In second and third-quarter 2020, the company opened 169 and 312 restaurants, respectively. Despite the coronavirus pandemic, the company expects to open 900 stores in 2020, compared with the prior estimate of 800-850. During third-quarter 2020, the company opened its 10,000th store.

Concerns

Restaurant industry traffic has been impacted by the coronavirus pandemic. Although situation in China is under control and the company has opened its restaurants, traffic is still below pre-outbreak levels. The pace of recovery is uneven as people continue to avoid going out and practice social distancing. Dismal traffic is likely to hurt the company same-store sales.

Yum China is encountering structural high cost of labor and rentals. Apart from wage inflation, the company is also bearing additional costs stemming from promotion, menu innovation and technological novelty

Zacks Rank & Key Picks

Yum China has a Zacks Rank #3 (Hold). Some better-ranked stocks, which warrant a look in the same space, include Texas Roadhouse, Inc. (TXRH - Free Report) , Red Robin Gourmet Burgers, Inc. (RRGB - Free Report) and Fiesta Restaurant Group, Inc. (FRGI - Free Report) . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Texas Roadhouse has a trailing four-quarter earnings surprise of 27%, on average.

Red Robin has a three-five year earnings per share growth rate of 10%.

Fiesta Restaurant’s 2021 earnings are expected to soar 418.8%.

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