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Yum China (YUMC) Stock up 20% YTD: Will the Rally Continue?
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Yum China Holdings, Inc. (YUMC - Free Report) is likely to benefit from digital initiatives, collaborations with third-party delivery providers, menu innovation and expansion efforts. However, dismal traffic due to the coronavirus pandemic along with rise in labor costs is concerning.
Let’s delve into factors highlighting why investors should hold on to the stock for the time being.
Factors Driving Growth
In order to drive digital sales and retain customers amid the coronavirus crisis, Yum China is leaving no stone unturned to make digital ordering more appealing to customers and increasingly efficient for restaurants.
Notably, the company has adopted a high-grade delivery strategy that covers collaborating with aggregators to source traffic and fulfilling orders by the company’s KFC riders. This is expected to help the company drive volumes and leverage the extensive network to control quality simultaneously.
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.
Another riveting growth potential of Yum China lies in its continual menu innovation to encourage top-line growth. During the third quarter 2020, the company introduced several exciting burger limited time offers. It also launched Spicy Skewers and stew pots in 10 cities and is gradually expanding reach. It is also serving coffee across restaurants and expanding the dessert category. The company will increase investment to expand presence in the Coffee segment as it believes the beverage has strong demand in China.
Also, the company continues to focus on relentless unit growth of restaurants in order to drive incremental sales. During third-quarter 2020, the company opened its 10,000th store.
More than 80% of the company's current portfolio has been remodeled or built over the past five years. The company has acquired a controlling stake in Huang Ji Huang that has more than 640 restaurants, almost all of which are franchise-based. It roughly possesses five restaurants per million people in China, which is expected to grow to 15 stores per million. With continuous rise in middle-class discretionary spending, growth opportunities in the restaurant base remain viable.
So far this year, shares of the company have rallied 20.2% compared with the Zacks Retail – Restaurants industry’s 12.5% growth.
Concerns
Yum China’s results in the coming quarters are likely to be impacted by the pandemic. Although the situation in China is under control and the company has reopened 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’s same-store sales.
Moreover, Yum China has been continuously seeing a spike in expenses, which have been detrimental to margins. Apart from wage inflation, the company is bearing additional costs stemming from promotion, menu innovation and technological novelty. Also, costs related to transactions and franchises are expected to rise in the near future.
Some better-ranked stocks in the same space include Jack in the Box Inc. (JACK - Free Report) , Ruth's Hospitality Group, Inc. and FAT Brands Inc. (FAT - Free Report) , each carrying a Zacks Rank #2 (Buy).
Jack in the Box has a three-five year earnings per share growth rate of 10.6%.
Ruth's Hospitality and FAT Brands’ earnings for 2021 are expected to surge 264.6% and 127%, respectively.
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.4% per year.
These 7 were selected because of their superior potential for immediate breakout.
Image: Bigstock
Yum China (YUMC) Stock up 20% YTD: Will the Rally Continue?
Yum China Holdings, Inc. (YUMC - Free Report) is likely to benefit from digital initiatives, collaborations with third-party delivery providers, menu innovation and expansion efforts. However, dismal traffic due to the coronavirus pandemic along with rise in labor costs is concerning.
Let’s delve into factors highlighting why investors should hold on to the stock for the time being.
Factors Driving Growth
In order to drive digital sales and retain customers amid the coronavirus crisis, Yum China is leaving no stone unturned to make digital ordering more appealing to customers and increasingly efficient for restaurants.
Notably, the company has adopted a high-grade delivery strategy that covers collaborating with aggregators to source traffic and fulfilling orders by the company’s KFC riders. This is expected to help the company drive volumes and leverage the extensive network to control quality simultaneously.
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.
Another riveting growth potential of Yum China lies in its continual menu innovation to encourage top-line growth. During the third quarter 2020, the company introduced several exciting burger limited time offers. It also launched Spicy Skewers and stew pots in 10 cities and is gradually expanding reach. It is also serving coffee across restaurants and expanding the dessert category. The company will increase investment to expand presence in the Coffee segment as it believes the beverage has strong demand in China.
Also, the company continues to focus on relentless unit growth of restaurants in order to drive incremental sales. During third-quarter 2020, the company opened its 10,000th store.
More than 80% of the company's current portfolio has been remodeled or built over the past five years. The company has acquired a controlling stake in Huang Ji Huang that has more than 640 restaurants, almost all of which are franchise-based. It roughly possesses five restaurants per million people in China, which is expected to grow to 15 stores per million. With continuous rise in middle-class discretionary spending, growth opportunities in the restaurant base remain viable.
So far this year, shares of the company have rallied 20.2% compared with the Zacks Retail – Restaurants industry’s 12.5% growth.
Concerns
Yum China’s results in the coming quarters are likely to be impacted by the pandemic. Although the situation in China is under control and the company has reopened 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’s same-store sales.
Moreover, Yum China has been continuously seeing a spike in expenses, which have been detrimental to margins. Apart from wage inflation, the company is bearing additional costs stemming from promotion, menu innovation and technological novelty. Also, costs related to transactions and franchises are expected to rise in the near future.
Zacks Rank & Key Picks
Yum China currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the same space include Jack in the Box Inc. (JACK - Free Report) , Ruth's Hospitality Group, Inc. and FAT Brands Inc. (FAT - Free Report) , each carrying a Zacks Rank #2 (Buy).
Jack in the Box has a three-five year earnings per share growth rate of 10.6%.
Ruth's Hospitality and FAT Brands’ earnings for 2021 are expected to surge 264.6% and 127%, respectively.
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.4% per year.
These 7 were selected because of their superior potential for immediate breakout.
See these time-sensitive tickers now >>