Yum China Holdings, Inc. (YUMC) is off to a roaring start to the week, with shares soaring in pre-market trading following the release of the company’s strong third-quarter earnings report. The news sent investors into a frenzy, propelling YUMC shares up by a remarkable 10.1% to $49.60. What drove this surge? Let’s dive into the details.
Revenue and Sales Growth Outperform Expectations
Yum China, the parent company of iconic brands like KFC and Pizza Hut in China, reported revenue of $3.07 billion for the third quarter, topping the consensus estimate of $3.05 billion. This represents a 5% year-over-year increase, signaling continued strong demand for the company’s offerings in the Chinese market.
The company’s total system sales, which include sales from both company-owned and franchised restaurants, grew by 4% year-over-year, excluding currency effects. This growth was fueled by a significant 7% increase in net new units, demonstrating Yum China’s aggressive expansion strategy. Despite the challenging macroeconomic environment, same-store sales, a key indicator of performance at existing restaurants, held steady at 97% of last year’s level, with same-store transactions edging up by 1% in the quarter.
Delivery Dominance and Digital Sales Power Growth
One of the key drivers of Yum China’s success has been its unwavering focus on delivery and digital sales. Delivery sales continued their impressive double-digit annual growth trajectory, surging by 18% year-over-year. This underscores the company’s ability to capitalize on the growing demand for convenient dining options in China.
Digital sales also hit a record high, reaching $2.61 billion in the quarter, with digital ordering accounting for an impressive 90% of total company sales. This demonstrates the company’s commitment to providing a seamless and engaging digital experience for its customers.
KFC and Pizza Hut Deliver Strong Performances
Both KFC and Pizza Hut, Yum China’s flagship brands, contributed significantly to the company’s overall success. KFC system sales saw a healthy 6% growth, driven by an 8% increase from new units. Pizza Hut system sales also saw a 2% rise, boosted by a 7% increase from new units.
Profitability on the Rise and Share Buyback Boost
Yum China’s core operating profit soared by 18% to $369 million, resulting in a healthy margin of 12.1% compared to 10.7% in the same period last year. The company’s adjusted earnings per share (EPS) of $0.77 exceeded analysts’ expectations of $0.68.
The company also announced an impressive increase in its share repurchase authorization, raising it by $1 billion to a total of $4.4 billion. As of November 1, Yum China repurchased approximately 71.8 million shares for $3.0 billion, leaving $1.4 billion in remaining authorization.
In addition to share repurchases, Yum China declared a cash dividend of $0.16 per share, payable on December 17, 2024, to shareholders of record on November 26, 2024.
Strategic Initiatives Drive Growth
Joey Wat, CEO of Yum China, highlighted the company’s successful delivery strategy, noting that it has allowed Yum China to capture more smaller order transactions and gain market share on aggregator platforms.
Wat also emphasized the impact of the company’s breakthrough business models, such as side-by-side KCOFFEE Cafes and Pizza Hut WOW. These new concepts have broadened Yum China’s addressable market, attracting new customers and capturing emerging demand. KCOFFEE Cafes have reached 500 stores, while Pizza Hut WOW has expanded to 150 stores.
Aggressive Expansion Plans and Strong Outlook
Yum China’s commitment to growth is evident in its ambitious expansion plans. The company anticipates that the franchise mix of net new stores will gradually increase to 40-50% for KFC and 20-30% for Pizza Hut over the next few years.
The company also expressed confidence in its cash-generating capabilities and announced plans to significantly increase capital returns to shareholders, raising its target from $3 billion to $4.5 billion between 2024 and 2026.
For the current fiscal year (FY24), Yum China reiterated its targets to open 1,500 to 1,700 new stores, invest $700 million to $850 million in capital expenditures, and return $1.5 billion to shareholders through dividends and share repurchases.
Investors seeking exposure to Yum China’s growth story can consider the AdvisorShares Restaurant ETF (EATZ) and Invesco Golden Dragon China ETF (PGJ).
Yum China’s strong third-quarter results, coupled with its aggressive expansion plans, have solidified its position as a leading player in the Chinese fast-food market. The company’s focus on innovation, digital sales, and strategic expansion suggests a bright future for Yum China, making it a compelling investment option for investors looking for exposure to the growing Chinese consumer market.
