A month has gone by since the last earnings report for Yum China Holdings (YUMC - Free Report) . Shares have added about 0.2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Yum China due for a pullback? 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 Q3 Earnings Beat, Revenues Miss Estimates
Yum China Holdings, reported mixed third-quarter 2019 results, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same. The bottom line surpassed the consensus estimate for the eighth straight quarter, whereas revenues lagged expectations in five out of the trailing six quarters.
Adjusted earnings of 58 cents surpassed the Zacks Consensus Estimate of 54 cents. The reported figure also increased 13.7% from the year-ago quarter. If the impact of market gains from the company’s equity investment in Meituan Dianping is taken into account, earnings rose 8% year over year.
Yum China gained from accelerated store openings and robust performance at KFC. During the reported quarter, the company achieved its 12th consecutive quarter of system sales growth for both KFC and Pizza Hut.
Detailed Revenue Discussion
The company’s total revenues of $2.32 billion lagged the consensus mark of $2.38 billion but grew 4.8% year over year. Excluding foreign currency translation, the top line increased 8% on a year-over-year basis.
Total system sales in the reported quarter improved 8% from the year-ago period, owing to system sales growth of 10% at KFC and 3% at Pizza Hut. Also, same-store sales grew 2% year over year, primarily owing to a 3% rise at KFC and 1% increase at Pizza Hut.
In the third quarter, total costs and expenses increased 3.9% year over year to $2,019 million. This upside was due to a 4.2% increase in restaurant expenses, 5.8% rise in Payroll and employee benefit costs, and a 6.7% hike in food and paper expenses.
Restaurant margin in the quarter under review was 17.7%, reflecting a 10-basis point increase from the year-ago period. This rise in restaurant margin was due to sales leverage, productivity improvement and other cost savings, partially offset by wage and commodity inflation and promotional activities.
Adjusted operating profit totaled $300 million, up from $269 million in the year-ago quarter. Adjusted net income increased to $223 million from $203 million in the prior-year period.
Cash and cash equivalents as of Sep 30, 2019 summed $1,355 million compared with $1,266 million on Dec 31, 2018. Inventories at the end of the third quarter were $317 million compared with $307 million at 2018-end.
In the quarter under review, the company’s board of directors declared cash dividend payout of 12 cents per share on its common stock, payable on Dec 17, 2019 to its stockholders of record at the close of business as of Nov 26, 2019. Additionally, Yum China repurchased 1.4 million shares for $64 million.
Unit Development and Other Details
In the third quarter, Yum China opened 231 new restaurants and remodeled 222 restaurants. The company’s online delivery contributed 20% to sales, up 3 percentage points from the prior-year quarter. Delivery services expanded to 1,225 cities, up from 1,063 in the prior-year period. Digital payments accounted for 91% of sales in the quarter under review, marking an increase of 9 percentage points year over year.
As of Sep 30, 2019, the KFC loyalty program constituted more than 200 million members and Pizza Hut loyalty program had in excess of 65 million members.
Yum China expects to reach the high end of its new store target of 800-850 for 2019. The company expects capital expenditure between $475 million and $525 million, at an effective tax rate below 28%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -16.67% due to these changes.
Currently, Yum China has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Following the exact same course, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions 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.