Yum China (NYSE:YUMC) Surprises With Q3 Sales

Fast-food company Yum China (NYSE:YUMC) reported Q3 CY2024 results exceeding the market’s revenue expectations, with sales up 5.4% year on year to $3.07 billion. Its non-GAAP profit of $0.77 per share was also 17.7% above analysts’ consensus estimates.

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Joey Wat, CEO of Yum China, commented, "We delivered strong results again in the third quarter. Operating profit increased by 15%, core operating profit grew 18%, and diluted EPS increased by 33%. OP margin expanded by 100 basis points, and restaurant margin improved year-over-year on a comparable basis. We also achieved seven consecutive quarters of same-store transaction growth and decade-long double-digit delivery sales growth. Our RGM 2.0 strategy is executing effectively, with a dual focus on operational efficiency and innovation. Savings generated from improved efficiency allowed us to reinvest in food innovation and our value-for-money offerings, driving incremental traffic to our stores. Same-store sales index improved sequentially for both KFC and Pizza Hut. These results demonstrate the effectiveness of our strategy and our ability to outperform in a challenging and fluid environment."

Company Overview

One of China’s largest restaurant companies, Yum China (NYSE:YUMC) is an independent entity spun off from Yum! Brands in 2016.

Traditional Fast Food

Traditional fast-food restaurants are renowned for their speed and convenience, boasting menus filled with familiar and budget-friendly items. Their reputations for on-the-go consumption make them favored destinations for individuals and families needing a quick meal. This class of restaurants, however, is fighting the perception that their meals are unhealthy and made with inferior ingredients, a battle that's especially relevant today given the consumers increasing focus on health and wellness.

Sales Growth

Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

Yum China is one of the most widely recognized restaurant chains and benefits from customer loyalty, a luxury many don’t have. However, its scale is a double-edged sword because there are only a finite number places to build new restaurants, making it harder to find incremental growth.

As you can see below, Yum China grew its sales at a tepid 5.3% compounded annual growth rate over the last five years (we compare to 2019 to normalize for COVID-19 impacts), but to its credit, it opened new restaurants and increased sales at existing, established dining locations.

This quarter, Yum China reported year-on-year revenue growth of 5.4%, and its $3.07 billion of revenue exceeded Wall Street’s estimates by 1.5%.

Looking ahead, sell-side analysts expect revenue to grow 3.4% over the next 12 months, a slight deceleration versus the last five years. This projection doesn't excite us and shows the market thinks its offerings will see some demand headwinds.

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Restaurant Performance

Number of Restaurants

A restaurant chain’s total number of dining locations often determines how much revenue it can generate.

Yum China sported 15,861 locations in the latest quarter. Over the last two years, it has opened new restaurants at a rapid clip and averaged 12.1% annual growth, among the fastest in the restaurant sector.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where the concept has few or no locations.

Same-Store Sales

The change in a company's restaurant base only tells one side of the story. The other is the performance of its existing locations, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales is an industry measure of whether revenue is growing at those existing restaurants and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Yum China’s demand has been healthy for a restaurant chain over the last two years. On average, the company has grown its same-store sales by a robust 3% per year. This performance gives it the confidence to meaningfully expand its restaurant base.

In the latest quarter, Yum China’s same-store sales rose 4% annually. This performance was more or less in line with the same quarter last year.

Key Takeaways from Yum China’s Q3 Results

We were impressed by how significantly Yum China blew past analysts’ EBITDA expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. The stock traded up 4.2% to $46.95 immediately after reporting.

Yum China put up rock-solid earnings, but one quarter doesn’t necessarily make the stock a buy. Let’s see if this is a good investment. If you’re making that decision, you should consider the bigger picture of valuation, business qualities, as well as the latest earnings. We cover that in our actionable full research report which you can read here, it’s free.