Yum China (YUMC), a licensee of Yum! Brands (YUM) in mainland China, is trading roughly flat today after reporting Q3 (Aug) earnings last night. They also announced: 1) a new CEO; 2) the initiation of a dividend; and 3) an increase the share repurchase authorization.
A little context would be helpful here. YUM owns several fast food chains, including KFC, Pizza Hut and Taco Bell. Expansion into China has been a huge focal point for YUM over the past several years. China accounted for more than half of total revenue. However, YUM was clearly struggling in China, in large part due to a slowing economy. There also has been some food safety issues and there is increasing competition.
Investors had been clamoring for YUM to spin-off its struggling China segment, which had been the laggard on overall results. In November 2016, investors got their wish when YUM separated into two independent, publicly-traded companies: Yum! Brands (YUM) Yum! China (YUMC).
Yum! China is a franchisee of Yum! Brands in mainland China. It has exclusive rights to three brands: KFC, Pizza Hut and Taco Bell. Yum China also owns the Little Sheep and East Dawning concepts outright. Yum China currently has nearly 7,800 restaurants in 1,100+ cities. KFC is by far its largest brand with nearly 5,300+ locations, followed by 2,100+ Pizza hut locations. Taco Bell is just getting off the ground in China.
Of note, Taco Bell had no presence in China until Yum China opened the first Taco Bell in China in January 2017 near Shanghai's landmark Oriental Pearl Tower. YUMC researched and fine-tuned the Taco Bell menu for China and the early response from customers has been very encouraging.
YUMC says that a new generation of younger consumers who are digitally sophisticated and brand driven are fueling growth in consumption in China. The ongoing growth of the middle class and urban population in China is expected to create the world's largest market for restaurant brands, with Yum China poised to be the market leader. Of note, YUMC has a strong capital position with no long term debt.
Turning to the Q3 (Aug) results, non-GAAP EPS was flat YoY at $0.52, which was below market expectations. Revenue rose 8.2% year/year to $2.04 bln, which was better than market expectations. Excluding FX impact, total system sales grew 10%, including growth of 11% at KFC and 7% at Pizza Hut. Same-store sales grew +6%, including comps of +7% at KFC, flat at Pizza Hut. In terms of new openings, YUMC opened 129 locations in AugQ (81 KFC, 38 Pizza Hut, 10 other) to finish the quarter with 7,747 restaurants.
In addition to earnings, the other big news is that YUMC a new CEO. Current CEO Micky Pant will transition to the roles of Vice Chairman of the Board and Senior Advisor. Joey Wat, who currently serves as COO will succeed Mr. Pant as CEO on March 1, 2018. The Board of Directors also approved a regular quarterly cash dividend program, and declared an initial cash dividend of $0.10 per share. The Board also has increased Yum China's existing share repurchase authorization from $300 million to an aggregate of $550 million.
In sum, the AugQ results were basically mixed, EPS was light but there was revenue upside and the +6% same store comps were a nice improvement from +3% in MayQ. The new CEO is big news as well. Investors were likely happy to see the initiation of a dividend program. Even though it computes to just a 1% annual yield, it should increase the pool of buyers for the stock as some funds are limited to investments that have dividends. Also, the higher share buyback authorization was good to see.