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Yum China (YUMC) Q2 Earnings Beat, Revenues Miss Estimates

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Yum China Holdings, Inc. (YUMC - Free Report) reported mixed second-quarter 2018 results, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same. Adjusted earnings of 36 cents surpassed the Zacks Consensus Estimate of 33 cents by 9.1%. The reported figure also increased 16% from the year-ago quarter number, on higher revenues.

Detailed Sales Discussion (Excluding Foreign Currency Translation)

Total revenues of $2,068 million missed the consensus mark of $2,092 million by 1.2% but grew 12% on a year-over-year basis.

Total system sales in the quarter increased 3% from the year-ago quarter, favored by system sales growth of 5% at KFC, partially offset by a 1% decline at Pizza Hut. However, total comps declined 1% primarily due to 4% fall at Pizza Hut. Comps at KFC were flat year-over-year.

Operating Highlights

In the second quarter, total costs and expenses increased 12% year over year to $1,875 million. The upside can be attributed to a 15% increase in restaurant expenses, a 16% rise in Payroll and employee benefits expenses and an 18% hike in food and paper expenses.

Restaurant margin in the quarter was 15.1%, reflecting a 150-basis point (bps) decline from the year-ago quarter. The fall in restaurant margin was due to the investment in product upgrades, and promotions at Pizza Hut and its sales deleverage.

Adjusted operating profit totaled $193 million, up 13% from the year-ago quarter. Net income increased 14% to $143 million from $125 million in the prior-year period.

Yum China Holdings Inc. Price, Consensus and EPS Surprise

Balance Sheet

Cash and cash equivalents as of Jun 30, 2018 summed $1,261 million compared with $1,059 million as of Dec 31, 2017. Inventories at the end of the second quarter came in at $276 million compared with $297 million at the end of 2017.

In the quarter under review, the company’s board of directors declared a cash dividend of 10 cents per share on common stock, payable Sep 19, 2018 to its stockholders of record at the close of business on Aug 29, 2018. Additionally, Yum China repurchased 1.9 million shares for $73.4 million.

Unit Development and Other Details

In the second quarter, Yum China opened 164 new restaurants and remodeled 365 restaurants. The company’s online delivery contributed 16% to its sales, up from 3% recorded in the prior-year quarter. Delivery services were expanded to 1,000 cities, up from 800 cities in the prior-year period. Mobile payment accounted for roughly 63% of the company’s sales in the reported quarter compared with 21% in the prior-year period.

As of Jun 30, 2018, the KFC loyalty program constituted more than 135 million members and the Pizza Hut loyalty program had in excess of 45 million members.

Yum China has a Zacks Rank #4 (Sell).

Stocks to Consider

Better-ranked stocks in the same space include BJ's Restaurants, Inc. (BJRI - Free Report) , Wingstop Inc. (WING - Free Report) and Carrols Restaurant Group, Inc. (TAST - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BJ's Restaurants has an impressive long-term earnings growth rate of 15.3%.

Wingstop reported better-than-expected earnings in the trailing four quarters, with an average beat of 16.2%.

Carrols Restaurant Group has long-term earnings growth rate of 20%.

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