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Yum China Holdings (YUMC): Resilient Performance Amidst Challenging Conditions
Published on September 24, 2024 | Ticker: YUMC

Yum China Holdings, Inc. (YUMC) has once again demonstrated its ability to navigate through a dynamic and competitive market, delivering solid financial results in the first quarter of 2024. Despite facing a high base of comparison from the previous year, Yum China managed to grow its system sales by 6%, reaching an all-time high revenue of $2.96 billion for the quarter.

Business Overview

KFC Performance

Yum China's flagship brands, KFC and Pizza Hut, continue to be the driving forces behind its success. KFC, the leading quick-service restaurant (QSR) brand in China, saw its system sales increase by 7% year-over-year, driven by robust net new unit contribution. The brand's portfolio expanded to 10,603 stores, adding 307 net new stores in the quarter. Same-store sales at KFC were at 98% of the prior year's level, with a 4% increase in same-store traffic and a 6% lower ticket average.

Pizza Hut Performance

Pizza Hut, the leading casual dining restaurant (CDR) brand in China, also delivered a strong performance, with its system sales increasing by 4% year-over-year, driven by net new unit contribution. The brand's portfolio reached 3,425 stores, with a record 113 net new stores added in the first quarter. Same-store sales at Pizza Hut were at 95% of the prior year's level, led by an 8% increase in traffic and a 12% lower ticket average.

Other Segments

Yum China's non-reportable operating segments, including Lavazza, Huang Ji Huang, Little Sheep, and Taco Bell, as well as its delivery and e-commerce businesses, also contributed to the overall revenue growth, with a 6% increase in total revenues for the segment.

Financials

Yum China's focus on operational efficiency and cost optimization has been a key driver of its profitability. The company's core operating profit, which excludes the impact of foreign exchange, special items, and other items affecting comparability, grew by 1% year-over-year to $396 million. This was achieved despite a 130 basis point decrease in restaurant margin, which was primarily due to higher cost of sales and cost of flavor, partially offset by improvements in occupancy and other costs.

Yum China's disciplined approach to capital allocation has also been a highlight. During the first quarter, Yum China returned a record $745 million to shareholders through share repurchases and cash dividends, equivalent to more than 4% of its outstanding shares. This was made possible by the company's strong cash flow generation and healthy cash position, with $3.1 billion in net cash at the end of the quarter.

Outlook

Looking ahead, Yum China remains cautiously optimistic about the second quarter, acknowledging the high base of comparison from the previous year. Yum China expects the operating environment to remain challenging, with consumers being more rational in their spending. However, Yum China is committed to executing its strategy of driving incremental traffic through compelling value-for-money offerings and engaging marketing campaigns.

For the full year, Yum China expects to open 1,500 to 1,700 net new stores, further expanding its footprint in China. The company's focus on operational efficiency, through initiatives like Project Fresh Eye, is expected to drive cost savings that can be passed on to customers and other stakeholders.

Conclusion

Yum China's resilience and adaptability have been key to its success in the ever-evolving Chinese market. Yum China's diversified brand portfolio, flexible store models, and strong digital capabilities have positioned it well to capitalize on the country's growing consumption potential. As Yum China continues to invest in growth and return capital to shareholders, it remains well-positioned to deliver long-term sustainable value for its stakeholders.

Yum China's financial performance in the first quarter of 2024 showcases its ability to navigate through challenging conditions. Yum China reported annual net income of $827 million, annual revenue of $10.98 billion, annual operating cash flow of $1.47 billion, and annual free cash flow of $763 million. In the first quarter of 2024, Yum China generated revenue of $2.96 billion and net income of $287 million.

The company's resilient performance is a testament to its strong brand portfolio, operational efficiency, and strategic initiatives. As Yum China continues to expand its footprint, optimize its cost structure, and return capital to shareholders, it remains well-positioned to capitalize on the growth opportunities in the Chinese market.

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