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Here's Why Investors Should Retain Yum China (YUMC) Stock Now

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Shares of Yum China Holdings, Inc. (YUMC - Free Report) have declined 17.1% in the past year compared with the industry’s decrease of 14%. However, the stock has displayed some resilience, increasing 15.7% in the past three months. The company’s sales-building efforts and expansion are likely to drive performance. Let’s delve deeper.

Growth Drivers

Yum China focuses on relentless unit growth to drive incremental sales. In 2018, the company opened 819 restaurants and remodeled 931 stores. This exceeded the company’s prior target of opening 600-650 stores in 2018. In 2019 and 2020, the company opened 1,006 and 1,165 new restaurants, respectively. During the fourth quarter of 2021, Yum China opened 563 gross new restaurants, owing to the development of the KFC and Pizza Hut brands. During second-quarter 2022, Yum China opened 246 gross new restaurants, driven by the development of the KFC and Pizza Hut brands. As of Jun 30, the company's total restaurant count was 12,170, up 1,147 stores year over year.

Another riveting growth potential of Yum China resides in its continual menu innovation to encourage top-line growth. KFC’s extraordinary performance is attributable to greater sales of menu offerings like crayfish burgers, stuffed chicken wings and spicy chicken burgers. During the second quarter of 2022, the company benefited from its new menu offerings. In KFC, the company unveiled innovative food comprising Wagyu and Angus beef burgers as well as a new chicken bucket (featuring chicken feet, chicken wings, tips, neck and other parts) in select cities.

This Zacks Rank #3 (Hold) company is investing in technology to drive growth. During the second quarter of 2022, the company upgraded its mobile ordering manual (in pizza Hut) with more flexible buy more save more combos and customized product displays. It also upgraded its KFC super app with a friendly interface option (less promotion information), pickup forms and streamlined ordering functions. Moreover, it stated to have progressed on digital capabilities (like restaurant sales forecasting system and pocket manager) and delivery 3.0 version to streamline restaurant efficiency. The company anticipates the initiatives and supply chain infrastructure to drive growth in the upcoming periods. Meanwhile, digital orders during the second quarter of 2022 contributed 89% to KFC and Pizza Hut's company sales. During the quarter, the company’s delivery contributed nearly 38% to KFC and Pizza Hut's company sales, up 7% from the prior-year quarter’s levels.

Moreover, the company is also gaining from a robust loyalty program. Regarding loyalty membership, Yum Brands created a robust loyalty program with more than 385 million loyalty members cumulatively. Pizza Hut’s membership increased by 100 million members. In the second quarter, member sales accounted for nearly 60% of system sales.

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Hurdles to Cross

Restaurant industry traffic and high costs continue to hurt the company’s performance. In the second quarter, the company's operations were affected by multiple COVID outbreaks in China. Tightened COVID curbs (including partial lockdowns and suspension of restaurant dine-in services) were implemented to counter the same. The measures paved a path for restricted mobility, reduced travel and softened consumer spending. Although the company initiated the reopening of stores (at reduced capacity), it expects restaurant traffic recovery to take time. Yum China is facing the structural high cost of labor and rentals. Apart from wage inflation, the company is bearing additional costs stemming from promotion, packaging upgrades, menu innovation and technological novelty.

On the other hand, same-store sales declined sharply in second-quarter 2022 due to the pandemic. Same-store sales dropped 16% year over year, primarily due to a decline of 16% in KFC and 15% in Pizza Hut. In April and May, same-store sales fell more than 20% year over year. Although the company reported some improvements in June, it anticipates sales recovery to be nonlinear and potentially volatile. Attributes such as weakening consumer sentiment, downward economic pressures and commodity price inflation pose a threat.

Key Picks

Some better-ranked stocks in the Zacks Retail-Wholesale sector are Potbelly Corporation (PBPB - Free Report) , Arcos Dorados Holdings Inc. (ARCO - Free Report) and Dollar Tree Inc. (DLTR - Free Report) .

Potbelly has a Zacks Rank #2 (Buy), at present. PBPB has a trailing four-quarter earnings surprise of 26.2%, on average. Shares of PBPB have declined 12.8% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Potbelly’s 2022 sales and EPS suggests growth of 17.5% and 100%, respectively, from the corresponding year-ago period’s levels.

Arcos Dorados carries a Zacks Rank #2. ARCO has a long-term earnings growth of 34.4%. Shares of the company have increased 38.9% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 27.1% and 104.2%, respectively, from the year-ago period’s levels.

Dollar Tree carries a Zacks Rank #2. DLTR has a trailing four-quarter earnings surprise of 13.1%, on average. The stock has gained 64% in the past year.

The Zacks Consensus Estimate for Dollar Tree’s 2022 sales and EPS suggests growth of 6.7% and 40.9%, respectively, from the corresponding year-ago period’s levels.

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