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Yum China (YUMC) Down 3.4% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Yum China Holdings (YUMC - Free Report) . Shares have lost about 3.4% 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 catalysts.

Yum China Q2 Earnings and Revenues Lag Estimates

Yum China reported second-quarter 2021 results, wherein both earnings and revenues missed the Zacks Consensus Estimate. However, both the metrics improved year over year. The top and bottom lines missed the respective consensus mark after beating the same in the trailing six quarters.

Earnings & Revenue Discussion

During the second quarter, the company reported adjusted diluted earnings of 42 cents that missed the Zacks Consensus Estimate of 43 cents by 2.3%. The reported figure increased 20% from the year-ago quarter.

Revenues of $2,451 million lagged the consensus mark of $2,490 million but improved 29% on a year-over-year basis. Excluding foreign currency translation, the top line increased 17% year over year.

Total system sales in the reported quarter rose 14% year over year. System sales at KFC moved up 14%, while the same at Pizza Hut increased 16%.

Meanwhile, same-store sales climbed 5% year over year, primarily owing to an increase of 4% at KFC and 11% at Pizza Hut.

Operating Highlights

In the second quarter, total costs and expenses expanded 25% year over year to $2,218 million compared with $1,774 million in the year-ago quarter. The upsurge can primarily be attributed to a 23% rise in food and paper costs, a 41% increase in payroll and employee benefits and a 25% surge in occupancy and other operating expenses.

Restaurant margin in the quarter under review was 15.8%, up 210 basis points from the year-ago quarter’s levels.

During the quarter, adjusted operating profit totaled $237 million, up 79.5% from the year-ago quarter. Adjusted net income amounted to $185 million compared with $136 million in the prior-year quarter.

Balance Sheet

Cash and cash equivalents as of Jun 30, 2021, totaled $1,209 million compared with $1,158 million as on Dec 31, 2020. Inventories in the second quarter were $380 million compared with $398 million at 2020-end.

The company’s board of directors announced a dividend of 12 cents per common share. The dividend is payable on Sep 16, 2021, to shareholders of record at the close of business as of Aug 25.

Unit Development and Other Updates

In the second quarter, Yum China opened 404 new restaurants. In the first-half of 2021, the company had opened 719 gross new stores. During the quarter under review, the company’s delivery contributed nearly 30% of KFC and Pizza Hut's company sales, up nearly one percentage point from the prior-year quarter.

Digital orders during the second quarter accounted for 85% of KFC and Pizza Hut's company sales compared with 80% in the previous-year quarter. Loyalty programs and member sales of KFC and Pizza Hut led to year-over-year growth. The KFC and Pizza Hut loyalty programs increased to more than 330 million members.

2021 Outlook

The company expects to open approximately 1,300 (gross) new stores in 2021, suggesting an increase from the prior estimate of 1,000 stores. Increased investments in terms of digitization and infrastructure are likely to support its expansion plans. Meanwhile, capital expenditures in 2021 are anticipated at $700-800 million, compared with the prior estimate of $600 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -5.19% due to these changes.

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 C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Yum China has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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