Why is Yum China (YUMC) down 2% since its last earnings report?

It has been about a month since Yum China Holdings (YUMC) last reported earnings. Shares have lost about 2% in that time, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Yum China due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to better understand the important catalysts.

Yum China’s first-quarter earnings and revenues beat estimates

Yum China reported impressive first-quarter 2024 results, with earnings and revenues beating the Zacks Consensus Estimate. Both profits and profits increased year-on-year. The positive impact can be attributed to the significant increase in total system sales and the contribution of new units.

Discussion about earnings and revenues

For the first quarter of 2024, the company reported adjusted earnings per share (EPS) of 71 cents, beating the Zacks Consensus Estimate of 66 cents. Financial results increased by 2.9% from 69 cents recorded a year ago.

Quarterly revenue of $2.96 billion topped the consensus estimate of $2.94 billion. Year-over-year, the top line increased by 1%. Excluding foreign currency translations, revenues increased by 7% year over year.

Total system sales increased 6% year over year. The positive impact can be attributed to the new unit’s net contribution of 8%. System sales at KFC and Pizza Hut increased by 7% and 4%, respectively (excluding currency conversion).

For the quarter, YUMC’s same-store sales reached 97% of year-ago levels, despite strong performance during the same period last year.

Operational highlights

In the first quarter of 2024, total costs and expenses were $2.6 billion, compared to $2.5 billion recorded in the prior-year quarter.

The restaurant’s margin was 17.6% compared to 20.3% a year earlier. The downside was the increased value for money offerings, which fueled traffic and wage inflation, which was partially offset by favorable commodity prices.

For the quarter, adjusted operating income was $374 million, compared with $419 million a year ago. Adjusted net income was $287 million, compared to $292 million in the year-ago quarter.

Balance

As of March 31, cash and cash equivalents were $883 million compared to $1.13 billion as of December 31, 2023. Inventories were $345 million compared to $424 million as of December 31, 2023.

In the first quarter, YUMC repurchased almost 16.6 million shares for $681 million. As of March 31, the company had $853 million available for the buyback program.

The board of directors declared a quarterly cash dividend of 16 cents per common share. The dividend will be paid on June 18 to shareholders of record as of May 28.

The story continues

Unit development and other updates

In the first quarter of 2024, Yum China opened 378 net new stores. As of March 31, the total number of restaurants reached 15,022.

In the quarter under review, Yum China deliveries accounted for 39% of KFC’s revenues and 37% of Pizza Hut’s sales.

Digital orders accounted for 89% of KFC and Pizza Hut sales, similar to the same quarter last year. KFC and Pizza Hut loyalty programs led to year-on-year growth, bringing membership numbers to over 485 million.

The forecast for 2024 has been retained

Yum China still expects 1,500-1,700 new stores to open this year. Management continues to forecast capital expenditures of $700 million to $850 million.

How have estimates changed since then?

It turns out that the estimate review has been trending downward over the past month.

VGM results

Currently, Yum China has a great Growth Score of A, although it lags behind in the Momentum Score with a D. However, the stock is rated a B on the value side, putting it in the second quintile for this investment strategy.

Overall, the company’s Total VGM Score is A. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for this company are generally on a downward trend, and the magnitude of these revisions indicates a downward shift. Notably, Yum China carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

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