Yum China (YUMC), a licensee of Yum! Brands (YUM) in mainland China, is trading sharply higher today (+12%) after reporting Q1 (Feb) earnings last night. 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 has 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 more than 7,600 restaurants in 1,100+ cities. KFC is by far its largest brand with nearly 5,300 locations, followed by 1,700+ Pizza hut locations. Taco Bell is just getting off the ground.
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 initial 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 Q1 (Feb) results, EPS rose 10% YoY to $0.44, which was a good bit better than expected while revenue fell 1.5% year/year to $1.28 bln, which was slightly better than expected. Same-store sales grew +1%, including growth of +1% at KFC and +2% at Pizza Hut Casual Dining. In terms of new openings, YUMC opened 133 locations (72 KFC, 30 Pizza Hut, 31 other) to finish the quarter with 7,663 restaurants. The company expects to open 550-600 new locations in 2017.
Both KFC and Pizza Hut Casual Dining delivered positive same-store sales, which was good to see in light of KFC lapping a particularly strong year ago performance. With over 7,600 restaurants, YUMC sees enjoys 2-to-1 lead over its nearest Western Quick-Service Restaurant competitor and an approximately 6-to-1 lead over the nearest Western Casual Dining Restaurant competitor in China.
In addition to growing its store base, YUMC sees its push into Digital and Delivery as key components of its growth strategy. And they did well in these areas in FebQ. Over 4,400 of its restaurants now offer delivery services with an infrastructure in place for continued growth. In FebQ, delivery represented about 12% of company sales. Also, with 93 mln loyalty members between KFC and Pizza Hut Casual Dining, YUMC believes it has unprecedented insights into consumer behavior and has been engaging with them across the digital eco-system: from pre-order to payment.
In sum, investors are pleased with YUMC's earnings report. With the spin-off from YUM happening only recently in November 2016, investors are still getting familiar with what YUMC looks like as a separate company from YUM. And the initial results have been pretty good as the Q1 results follows a strong Q4 result as well.