Yum China (YUMC 38.95, +2.50, +6.86%), a licensee of Yum! Brands (YUM) in
mainland China, is trading sharply higher today after the company reported
strong Q4 results. Non-GAAP EPS declined 14% to $0.12, but because a bigger
decline than that was expected, this was a nicely upside result. Revenue rose
2.2% year/year to $1.91 bln, which was roughly in-line.
Of course, the key metric with YUMC and many restaurant stocks is same store sales. Same-store sales grew +2% in Q4, with a +3% increase at KFC and a -4% decrease at Pizza Hut, excluding F/X. Total system sales grew +6%, with +9% growth at KFC partially offset by a -2% decline at Pizza Hut, excluding F/X. Restaurant margin was 11.5%, as compared with 11.6% in the prior year period.
In November 2016, the formerly unified entity YUM separated, to the approval of its investors, into two independent, publicly-traded companies: Yum! Brands (now YUM) and Yum! China (YUMC). This was YUMC's ninth consecutive quarter of system sales growth since the spin-off. This growth was led by accelerated new store openings and a robust performance at KFC. Although Pizza Hut's sales remained soft on balance in Q4, YUMC was pleased to see that same-store traffic did grow by +1%, accompanied by positive trends in customer feedback.
In 2018, YUMC aggressively expanded its footprint, opening 819 new stores across all city tiers. In spite of relative softness in the macro backdrop, YUMC is confident that it has the right strategy in place to capitalize on the long-term potential of the China market.
Looking into 2019, YUMC expects it will continue to face
potential market softness. Of note in 1Q19, YUMC is lapping a robust 1Q18
result last year, so that may temper growth a bit this quarter. YUMC has posted
very strong results during the past three Chinese New Year holidays.
In sum, the macro environment in China is not great right now, and the trade dispute between the Chinese and U.S. governments is not helping. However, YUMC's Q4 results were pretty good, especially at its KFC segment. The Pizza Hut segment is still struggling a bit, though, and Taco Bell is just getting off the ground in China.
From a broader perspective, expansion into China has been a huge focal point for YUM over the past several years. However, YUM was clearly struggling in China, in large part due to a slowing economy. Food safety issues and increasing competition also impacted performance. Spinning off YUMC as its own company was a move cheered by investors.
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 a market leader. Of note, YUMC has a strong capital position with no long-term debt.
The stock price has been trending lower over the past year, going from around $46 a year ago to close at $36.45 yesterday. The stock is up a robust 10% today on what is being viewed as a stronger-than-expected Q4 result. Investors should understand the macro environment in China is not great right now and will take time to improve and that YUMC is lapping tough comps in Q1, but YUMC will be in a strong position when macro conditions improve.