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Yum China (YUMC +8%) is making a strong move following its Q3 earnings report this morning. It reported its largest EPS beat since 1Q23. Revenue rose 5.4% yr/yr to $3.07 bln, which was modestly above analyst expectations.

• Breaking it down by brand, KFC comps declined by -2% but segment sales grew a healthy 6% yr/yr (+5% CC) to $2.31 bln. That was likely fueled by a huge 14% yr/yr jump in restaurants to 11,283. YUMC says its strategy to widen the price range and capture lower ticket average delivery orders are yielding results. Entry price combos, which have drawn incremental traffic and delivery sales, continue to grow double digits. Items like coffee and breakfast continue to outperform.
• Pizza Hut comps also declined -6%, however, segment sales grew 2% (+1% CC) to $615 mln. A large 13% increase in restaurant locations to 3,606 helped Q3 sales results. Average ticket was 9% lower yr/yr, which is in-line with its strategy to transform the brand to increase mass market appeal. Its entry price pizza, burgers and single-person meals attracted incremental traffic from value conscious consumers and solo diners, which lowers per person spending.
• While at first glance, lower comps at both segments is not great to see. However, both segments saw sequential improvement from Q2 (KFC -3%; Pizza Hut -8%) despite what it describes as a challenging and fluid environment. Also, YUMC has been focusing more on value offerings, which is driving incremental traffic but does impact the top line. YUMC regards both system sales and same-store sales growth as equally important.
• YUMC has also been infusing some innovation into its menu. At KFC, YUMC says it is breathing fresh energy into its flagship products and into new items, like the new original recipe Chicken Burger which was introduced in Q2. Customers are loving it and it does not require new ingredients in the stores. Also, KFC has been focusing more on coffee sales. It sold nearly 200 mln cups of KCOFFEE in the first nine months of 2024, surpassing all cups sold in 2023.
• YUMC says the Pizza Hut brand is making solid progress. In order to enhance its mass market appeal, Pizza Hut has launched more entry priced products designed for value cautious customers and solo diners, which is capturing more smaller ticket orders. It has also recently upgraded its hand-tossed pizza dough for better taste, consistency and easier preparation. Pizza Hut has also improved its profitability as it has boosted operational efficiency with simplified ingredients and redesigned kitchen processes.

Overall, investors like what they see with YUMC's Q3 report despite difficult macro headwinds in China. Similar to the US, YUMC has stepped up its focus on offering value items at its restaurants and that strategy is resonating with Chinese consumers and driving incremental traffic. The comps were not great, but they still showed noticeable improvement from Q2. The stock had been trending lower through much of 2024 on concerns about China's economy. However, the stock has since been energized since early August following better-than-feared Q2 results and now nice upside in Q3.