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Yum China Holdings, Inc. (NYSE:YUMC)
Q2 2019 Earnings Call
Jul 31, 2019, 8:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to today's Yum China 2019 Second Quarter Earnings Conference Call. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday the 31st of July 2019.

I would now like to hand the conference over to your speaker today, Florence Lip. Thank you. Please go ahead.

Florence Lip -- Senior Director Investor Relations

Thank you. Sarah. Hello everyone and thank you for joining Yum China's second quarter 2019 earnings conference call. Joining us on today's call are Ms. Joey Wat, CEO of Yum China; and Mr. Jacky Lo, CFO of the Company. Before we get started, I'd like to remind you that our earnings call and investor presentation contain forward-looking statements, which are subject to future events and uncertainties.

Our actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This call also contains certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures and reconciliation thereto. Today's call includes three sections. First, Joey will cover Yum China's second quarter 2019 highlights and Jacky will cover the financial results. We will then open the call to questions. The webcast of this call will be available on our website. A PowerPoint presentation, which contains operational and financial information for the quarter is available for download.

At this time, I would like to turn the call over to Ms. Joey Wat, CEO of Yum China.

Joey Wat -- Chief Executive Officer

Thank you, Florence. Hello, everyone and thank you for joining us today. As we hit the midpoint of the year, I want to share some of the reasons why I'm excited about where we are and the future of Yum China. First our strong performance in the first half of the year demonstrate our resilient business model. KFC has consistently delivered strong same-store sales growth and the revitalization of Pizza Hut is clearly on track. Second, with new and exciting menu options growing digital, data and delivery capabilities in a variety of new store formats, we are driving innovations throughout our business. And I'm confident that these innovations will drive the sustainable and profitable growth of our business. Third, with accelerated store opening it's clear that there are many untapped opportunities to expand our portfolio of restaurants across all city tiers in China. And of course, all of these is enabling us to continue to deliver significant shareholder return, with a focused capital return program that combines both dividends and share repurchases.

Now, let me share a few highlights of the quarter before diving into the details about our two core brands. Yum China delivered another strong quarter in Q2 with solid revenue and profit growth, despite several notable challenges such as macro uncertainty and [Indecipherable] chicken prices. In Q2, we delivered our 11th consecutive quarter of system sales growth since we spun off from Yum Brands.

Strong system sales growth of 10% was driven by two consecutive quarters of positive same-store sales at both of our core brands, KFC and Pizza Hut, as well as our ongoing expansion of the store network to serve attractive markets in China. We opened 178 new stores in the second quarter, increasing our year-to-date total to 415 stores. At this pace, we expect to exceed our original full-year target, which Jacky will cover shortly.

Sales leverage and diligent cost control allowed us to increase operating profit by 6%, despite margin pressure due to rising chicken prices, wage increases, ongoing promotional activities and currency headwinds. And we continue to make strides in digital with over 200 million digital members already. We have a world leading restaurant membership program.

Now, I will provide more color on the performance and strategy of our key brands, starting with KFC. KFC reported another strong quarter of growth by offering exciting products and great value, driving delivery growth and more effectively engaging with our customers through our digital ecosystem. KFC achieved robust same-store sales growth of 5% in Q2. With our aggressive new store build-out, system sales increased by 12%.

KFC opened 136 new stores in the second quarter and we will continue to expand to capture the opportunities we see across city tiers in China. Operating profit grew 10% in constant currency, an excellent result considering the cost pressures, which Jacky will elaborate on. We launched exciting new limited time offers or LTO, such as chicken and Crayfish Taco and double chilli chicken. We also launched our new premium Burger online nationwide, including shrimp and imported beef, which aims to capture consumers who are willing to pay more for premium products and drive a higher ticket average. These initiatives are aligned with our strategy of increasing non-chicken protein options to better manage commodity causes, as well as providing new and exciting options for our customers.

Our key growth categories namely breakfast, coffee, dessert and delivery already accounted for over one-third of sales. These initiatives led by improved customer engagement, menu offerings and store formats all drove strong sales growth in the quarter. K Coffee in particular has continued to rapidly gain traction and we sold over 60 million cups in the first half of 2019, which is an increase of over 45 percentage year-over-year, in part due to our effective cross selling via digital membership.

Throughout the quarter, we also maintained our focus on smart value, most notably with Crazy Thursday which has gained very strong consumer awareness. We also launched chicken wing bucket and Festival bucket promotion for sharing occasions and continued building on our YUMC Pay platform by offering attractive discounts in partnership with UnionPay.

Turning to Digital. We are a market leader in this space and we continue to build and leverage our powerful digital ecosystem, which is having a significant positive impact across our entire business. In the second quarter, we updated our Super APP for KFC with improved customer interface and functionality. The power of our digital ecosystem to drive sales and improve customer experience continues to expand. Members now accounted for 54% of total sales, up 9 percentage points and Digital orders account for 63%, up 21 percentage points year-over-year, largely due to the growth in mobile preorders.

Combined, our various digital initiatives and capabilities are having a positive impact on spending per user. In particular, our privileged subscription program, which is essentially paid membership increased in popularity with over 4 million so in the second quarter, three times as many as in the first quarter. We continue to see a significant uptick in frequency and spending from these members. And we are creating new offers that will roll out in the second half of the year.

Delivery represent 18% of KFC business in the second quarter, up 5 percentage points year-over-year and growth through our own channels continue to exceed growth rate via data's . KFC's ability to address customer preferences through offering smart value, continuous innovations in menu and daypart and leadership in digital and delivery have created a robust platform for sustainable and profitable growth. We will pursue an aggressive store building program for the remainder of 2019 and remain very excited about KFC's long runway for growth in China.

Next, I will provide some color on Pizza Hut's performance. Pizza Hut continues to make good progress on the path toward revitalization. We achieved a second consecutive quarter of same-store sales growth on the back of significant increase in traffic, in both dining and delivery. We were particularly pleased by the ongoing traffic growth in dining stores, which is the first time we have achieved successive quarters of traffic growth at Pizza Hut dining since 2014. The Pizza Hut revitalization program continue to focus on four pillars, fixing the fundamentals, driving digital, optimizing delivery and enhancing asset portfolio.

First, let's look at the fundamentals. This was the first full quarter since launching our new permanent menu in March. We streamlined and improved our menu with around 35 percentage less items compared with the pre-revitalization menu. And approximately 75% of our menu items are either new or upgraded. The new menu has been well received by customers, particularly the innovative and trendy products, ease of ordering an abundant choices of steak.

We introduced exciting limited time offers such as [Foreign Speech] shrimp pizza [Foreign Speech] pizza, [Foreign Speech] pizza, [Foreign Speech] pizza which is the best, as well as our double Crispy Pizza, which is a cheese filled thin and crispy pizza. We also launched specials to drive strong sales over holidays such as Children's Day and Labor Day among others. We remain focused on continuing to drive increased traffic in particular with attractive value offers. Our signature Scream [Phonetic] Wednesday promotion with special offers on steak, pizza, dessert and drinks at RMB29 or RMB39 continue to drive strong incremental sales during the quarter.

Like KFC, we are leveraging and building on our digital ecosystem to drive increased traffic and sales and continue to make progress. Digital members now account for 47% of sales. We continue to refine and expand our privileged subscription offer with 1 million so in Q2. We've enhanced over our family privilege program remains popular and has resulted in increased member frequency and spending. We will further still on the member program in the second half of the year.

Turning to delivery. Effective promotions and improved operations continue to drive significant growth. Delivery now account for 25% of sales, up 2 percentage points year-over-year with sales from our own channels again growing much faster, standby aggregators. We continue to optimize operations after taking back control of last mile delivery late last year and we are seeing continuous improvement in operational efficiency and customer satisfaction. For example, the average fulfillment time and complain rate have been improving month-on-month since the beginning of the year.

Lastly, we continue to enhance our asset portfolio through accelerated remodels and multiple store formats. To create a more comfortable and stylish dining environment, we are targeting around 500 remodels in 2019 and to complete the refresh of our portfolio by 2021. We remodeled 78 stores in the second quarter and we will accelerate the pace through the rest of the year. We also opened 26 new stores in the second quarter similar to the same period in 2018.

We are continuing to test smaller store format including the hub and spoke model to more efficiently increase our service coverage. We are encouraged by the initial result and plan to open more stores in smaller format in the second half of the year. Together, these revitalization initiatives are having a positive impact on the brand and I'm confident in the long-term opportunity for Pizza Hut in China. We are encouraged to see the second consecutive quarter of positive same-store sales growth and improving profitability.

This is the result of relentless focus on our four pillars. They are important operational areas that will always have our ongoing attention as they are crucial to support the core business. Given the scale of the business and the competitive environment, we will maintain focus on these areas in order to make additional, important improvements to cement the positive momentum of the Pizza Hut brand.

Lastly, turning to our new stand-alone coffee concept COFFii & JOY at X stores in the second quarter taking up to -- taking us up to 26 stores now across X cities. Our coffee machines have also been rolled out to 11 WeWill [Phonetic] offices in Shanghai and Beijing. Coffee as a category is not new to us and we have many reasons to be confident in this as an important market opportunity in China. That said, we are taking our time to explore different format, fine-tuning the daypart and product mix, building store density in primary trade zones and learning more about the supply chain.

With that, I will hand over the call to our CFO, Jacky Lo, who will cover our financial performance in more detail.

Jacky Lo -- Chief Financial Officer and Treasurer

Thank you, Joey. Good day, everyone and thank you for joining us. Total revenues reached $2.1 billion in the second quarter of 2019, up 10% year-over-year excluding foreign exchange translation. Total system sales grew 10% year-over-year ex F/X, primarily due to strong same-store sales growth and accelerated new store openings at KFC, as well as improving sales at Pizza Hut. We opened 178 new stores during the quarter, increasing our total portfolio to 8,751 restaurants as of the end of June. For the full-year, as Joey mentioned, we are ahead of schedule on this front, which highlights the large volume of untapped market opportunities throughout China. We now anticipate opening 800 to 850 new stores in 2019, with incremental stores planned across multiple brands. The majority of these are coming from KFC and the new inclusion of COFFii & JOY in the target. During the quarter, KFC year-over-year system sales grew 12%, while Pizza Hut system sales increased 4%, both excluding FX. Yum China's same-store sales increased 4% and KFC same-store sales grew 5%, while Pizza Hut achieved it's second consecutive quarter of same-store sales growth of 1%.

During the quarter, KFC traffic increased 3% year-over-year and ticket average increased 2% year-over-year due to pricing and increased share of delivery, offset by increased promotions. Pizza Hut traffic increased 9% year-over-year and remains positive for both dining and delivery due to our successful ongoing efforts to drive traffic, including increased value promotions. Combined with the increasing share of delivery, which has a lower ticket average, overall ticket average decreased 7% year-over-year. KFC restaurant margin remained under pressure at 16.1% in the second quarter of 2019, compared to 16.8% in the same period last year.

The previously flagged chicken inflation, wage inflation and value campaigns continue to offset positive sales leverage. Average commodity inflation was slightly higher compared to the first quarter at mid-single digit and due to the lack of inventory benefit, the margin impact was more than in the first quarter. Pizza Hut slightly improved its restaurant margin year-over-year from 11.1% to 11.3%. Commodity deflation and other store cost savings offset the margin pressure from promotional activities.

Overall, Yum China restaurant margin was 14.7%, down 0.4 percentage points from the same period last year. Wage inflation was 6%, while commodity inflation was 3% compared to the same period last year. With chicken price increase the major driver of commodity inflation, cost inflation was partly offset by sales leverage and effective store cost management.

For the remainder of 2019, we anticipate the year-over-year impact of the chicken price increase has peaked in the second quarter, although, we continue to expect to see pressure in the second half.

We continue to expect overall commodity inflation to be low-single digit for the full-year. G&A expense was up 16% year-over-year ex F/X or 11% excluding one-off benefits in both periods, mainly due to salary increases and higher performance-related compensation. Our long-term goal remains to maintain a G&A growth rate lower than the revenue growth rate.

Our closure and impairment charge in the second quarter was $4 million, down from $17 million during the second quarter in 2018, mainly due to the additional impairment review completed in the first quarter following the adoption of the new lease accounting standard. On a year-to-date basis, the closure and impairment charge is in line with the same period last year.

Operating profit for the second quarter of 2019 increased 6% year-over-year. Due to the depreciation of Renminbi against the US dollar, foreign exchange translation negatively impact our total operating profit by $60 million or 8% during the quarter. Excluding FX, operating profit increased 14% year-over-year. For the second quarter of 2019, KFC operating profit increased 10% year-over-year ex F/X, mainly driven by same-store sales growth and net unit growth.

Pizza Hut operating profit improved 60% ex F/X largely due to lower impairment charge. Finally, diluted EPS was $0.46 in the second quarter of 2019, compared to $0.36 in the same period last year. Diluted EPS includes a positive mark-to-market of $17 million or $0.04 per share from our equity investment in Meituan. Our effective tax rate during the second quarter was 20%, 6 percentage points lower than the second quarter last year, primarily due to lower accrued residual US tax benefit from the Meituan mark-to-market gain, which is non-taxable and lower accrued foreign withholding tax on estimated repatriation of earnings outside of China. Our best estimate of the effective tax rate in 2019 continues to be below 28%, excluding any impact from the mark-to-market gain or loss from our equity investment in Meituan.

Next let me cover our capital allocation strategy. Our strong free cash flow generation continued in the first half of 2019, with net cash from operations of $657 million and free cash flow of $445 million after subtracting $212 million in capital expenditures. We have over $1.58 billion in cash and short-term investment. We remain committed to returning excess capital to shareholders with $120 million total returns in the second quarter, including a cash dividend of $45 million and share repurchases of $75 million. There is approximately $820 million remaining under the share repurchase authorization as of the end of June 2019. As we stated at our recent Investor Day we have the capacity to return at least 1.5 trillion to shareholders over the next three years. In the first six months of 2019, we have already returned 231 million. We'll also continue to invest for growth given the strong returns from new builds. Full-year 2019 capex is expected to be about $475 million to $525 million, up slightly from our initial expectations due to the increased in store builds.

Now I will turn to our outlook. We have started 2019 with two good quarters of strong sales and operating profit growth, which shows that we have a solid foundation in place. We'll continue to focus on leveraging our leading digital capabilities to drive business and leading development capabilities to expand our store network. However, there are some specific near-term headwinds we do need to manage through in the second half of the year. At KFC, while we believe that the impact of year-over-year chicken price increases has peaked in the second quarter, we expect that commodity inflation will continue to weigh on margins in the second half of the year.

We intend to be more selective in our promotional activities to manage margin pressure. We'll also begin to lap several key sales initiatives, such as our value promotions that successfully drove same-store sales since the second half of 2018. As a result, we expect that our same-store sales growth will moderate in the second half of the year. At Pizza Hut, while we continue to expect quarterly fluctuations as we roll out our initiative in scale, we are very encouraged by the progress of our brand revitalization program.

We'll maintain our strategy of driving traffic through value promotions. In addition, our remodeling program will ramp up with approximately 400 plant remodels over the next two quarters. This will put pressure on sales and restaurant margin in the short-term, but is an important component of the long-term revitalization of the brand.

With all of this said, we are pleased with where we are as a business and we are confident in our ability to deliver sustainable and profitable growth and shareholder value over the long-term.

With that, I'll pass you back to Florence to start the Q&A.

Florence Lip -- Senior Director Investor Relations

Thanks, Jacky. We will now open the call for questions to give as many people as possible the chance to ask questions, please limit your questions to one at a time. Operator, please start the Q&A.

Questions and Answers:

Operator

Thank you so much. [Operator Instructions] And our first question comes from the line of Michelle Cheng from Goldman Sachs. Michelle, your line is now open.

Michelle Cheng -- Goldman Sachs -- Analyst

Hi. Thank you management. Congratulations for the good results again. And I would like to -- looking to more details on the cost side. Jacky, you just mentioned that for the first quarter KFC's commodity inflation is slightly above mid-single digit. And can you give us more details about the chicken cost. And also we understand other commodity costs are actually down. So, can you also share any major commodity items like packaging material et-cetera? And how much these benefit we have been seeing in the first half. Thank you.

Jacky Lo -- Chief Financial Officer and Treasurer

Yeah, Michelle, on the commodity inflation for KFC, the chicken -- the commodity inflation was mid-single digit for both Q1 and Q2. But if you recall in Q1, we actually benefit a little bit from the inventory we started up in Q4 2018. And so the -- even though both quarters are mid-single digit, it was slightly higher this quarter. And also in terms of chicken, I mean, it's only one of many commodities for KFC. So it represents about 40% of our cost of sales. And so overall the chicken price, it has gone up and the impact year-over-year we already talked about we expect to peak this quarter, so it will moderate a little bit in the second half, but they will still put pressure on the margin.

And -- so in terms of the inflation rate, so KFC has managed it really well. So it has been about low-double digit for both Q1 and Q2, because we have very strong partnership with our suppliers, so we work closely with them to actually manage the inflation rate. So and yeah, as you point out there, other commodities that the price has actually gone down, but I will just continue to work on our margin initiatives through.

I talk about maybe we'll pull back down on the promotional activities in the second half and we'll continue to explore like other parts of chicken or non-chicken protein. So these are all the ways that we can use to mitigate commodity inflation pressure.

Joey Wat -- Chief Executive Officer

And Michelle, you mentioned about the other commodity, I'll give example. The other commodity price actually has a bit of deflation was steak for Pizza Hut, I mean not to forget, for Pizza Hut 10% of our sales actually is from steak. And how did we get there, we explore more choices, because steak, so in Pizza Hut or import. So we went for steaks in different countries. And so different part of steaks and cook it well and then serve to the customer. So as you can see as we managed chicken price increase, which was significant for the first half, we not only explore other parts of chicken such as chicken breast or even the [Indecipherable] the tip of the chicken wing to manage of course, but we also look at other opportunities outside chicken to balance the pressure in the commodity price increase. Thank you, Michelle.

Michelle Cheng -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you so much. And our next question comes from the line of Xiaopo Wei from Citigroup. Your line is now open. Thank you.

Xiaopo Wei -- Citigroup -- Analyst

Hi, Joey and Jacky. Congratulations on another strong quarter. And my question is related to your commentary on the second half sales growth. As indicated in press release, management mentioned that the top line growth in the second half will be moderated due to the higher lapping which is understandable, but shall we say that second half, the gross margin will be -- the pressure will be much less than the first half due to the peak out of the chicken cost in the second quarter and also just more control of the promotion cost.

Jacky Lo -- Chief Financial Officer and Treasurer

Joey, you want me to take this?

Joey Wat -- Chief Executive Officer

Yes, great [Overlap Speech].

Jacky Lo -- Chief Financial Officer and Treasurer

Yeah, thanks Xiaopo. Thanks for the question. So first on the sales. So, yeah, as we point out, we expect same-store sales growth will moderate as we begin to lap several key sales initiative, for example the Crazy Thursday and also the privilege program for KFC. So these initiatives have driven our same-store sales growth in the second half of 2018. So we'll be lapping these. And so in a way we expect the sales leverage impact will reduce in the second half. And in terms of margin, yeah, so chicken price as I mentioned, we believe the year-over-year impact of chicken price increase has peaked in Q2, but it will continue to put pressure on the margin. And also we have wage inflation. And also as the delivery business grows, we'll also incur additional write-offs. So these are all additional costs and pressure on the margin.

And also for KFC, we will continue to assert new unit builds to capture market share. So, and the new unit sales usually are margin dilutive because it takes times to nurture the start until maturity. So that will also put some pressure on KFC restaurant margin. And also for Pizza Hut, we mentioned that about 400 remodels that we have to do in the second half of the year. So that will also cost pressure on the top line and also the restaurant margin for Pizza Hut as far as Yum China. Yeah, but I mean we have dealt with price volatility and we have dealt with inflation before. So, we will just continue to identify like labor productivity to address cost of labor. And also we will work with our suppliers and also look at our product mix to improve our cost of sales.

Joey Wat -- Chief Executive Officer

Thank you, Jacky. For the -- maybe just a small point about cost pressure on the delivery because of the very exciting growth in the business, that's one part of it. The other part is the delivery driver -- delivery the rider costs. We probably remember early in the year we talked about, we are rolling out delivery 3.0 this year. And then from second half of the year, we are moving to the zone of having trade zone for the brand on a stand-alone basis. We'll do it one at a time, one trade zone at a time because it's very detailed work and next year our plan is to look at multiple brand in the trade zone. So we have very clear short-term and long-term plan how to look at the productivity of delivery rider, while also emphasizing on the delivery quality, the on-time delivery, the complaint rate and the sales growth for the delivery business. So it's a holistic consideration other than just cost pressure. Thank you,

Xiaopo.

Xiaopo Wei -- Citigroup -- Analyst

Thank you.

Operator

Thank you. Thank you so much. And our next question comes from the line of Brian Bittner from Oppenheimer. Brian, your line is now open.

Michael Tamas -- Oppenheimer -- Analyst

Hi, great, thanks. This is actually Mike Tamas on for Brian. And I was wondering if you could just kind of talk about the Pizza Hut margins and what sort of change there between the first quarter and the second quarter, you guys had similar sales trends, but the margin performance was much different. So just trying to figure out what happened there and what does that look like going forward excluding some of the pressure from the remodels that you were talking about, so just like the core margins and if you maybe could address those? Thanks.

Jacky Lo -- Chief Financial Officer and Treasurer

Yeah, Mike, I will take your question. So the first question like the difference between Q1 and Q2, so if you remember Q1, we actually mentioned this, we have very low base in the year before. So particularly during Chinese New Year 2018, we had some labor inefficiency. So that's why the year -- the base was really low. And so the year-over-year improvement was quite significant. So I recall it was over 3.5 percentage points improvement in Q1 and versus only above 0.2 percentage point increase this quarter. And also we actually initiated a lot of labor productivity initiatives in the second half of last year. And so we are actually start lapping all these initiatives in the second quarter. And also if you recall, we also continue to invest a lot in promotional activities to drive traffic. So in terms of like the impact, so, yes, in terms of food and paper there was actually deflation for Pizza Hut, but that's offset by all the [Indecipherable] activities, the promotional activities and value campaign such as Scream Wednesday, because we want to continue to drive traffic and view on the value propositions. And in terms of labor cost, all this is as labor inflation and also because Pizza's delivery is growing, so that's also increased rider costs as well.

And -- but I mean we have some occupancy savings like less depreciation of the store impairment, we have savings in utilities. So these kind of offset the rest of our margin pressure from inflation. But looking ahead for the second half, I think generally speaking, I think keep in mind that the margin in the second half is typically lower than the first half. And also we have a very clear and deliberate strategy, continue to drive traffic through promotional activities.

So we will continue to invest in our cost of sales, but this is part of our revitalization strategy to stabilize and restore traffic and sales and then we will work on profit. So -- and we will continue to look for opportunities to reduce our operating costs and optimize our menu costs. So I think Joey touched on this earlier, we launched a new menu on -- in late March. So that actually optimize some of our menu cost as well.

So that will impact -- offset some of the impact from the value promotions. Yeah but because as I mentioned, we have a lot of initiatives that were initiated in the second half of last year. So we'll continue that productivity but the impact would diminish for sure in the second half. Yeah, so and also I talked about this earlier, we are going to remodel about 400 stores in the second half, mostly coming in Q3 and Q4. And so -- it could be my Q3 is actually our peak season. So that would put some pressure on our top line and also the restaurant margin. Yeah, but overall in the long term, we are very confident like the brand is moving in the right direction. We are -- we will be able to restore the restaurant margin back to the pre-buy -- pre-revitalization level.

Michael Tamas -- Oppenheimer -- Analyst

Thank you.

Thank you.

Operator

Thank you so much. And your next question comes from the line of Lillian Lou from Morgan Stanley. Lillian, you may now ask your question.

Lillian Lou -- Morgan Stanley -- Analyst

Hey, thanks, Joey and Jacky for the explanation. I have a question on the store expansion plan because I think you mentioned earlier, we are accelerating the new unit expansion and the guidance actually increased quite significantly to 800 to 850. So -- but I also note that actually the capex guidance increase was much less compared to the magnitude of the store expansion. So just trying to understand the rationale here because we kind of see small formats in the new store opening. And in terms of the store expansion plan where are they i.e. majority of the new actual units going to be in the lower tier market. So that's the question. And then related to that, I think also Jo you mentioned the second half same-store sales may not see the similar rate growth rate as in second Q and the first Q. And also that's primarily because the base and also remodeling. So for the new store expansion, is -- if -- is a smaller format is kind of adding more in the portfolio, does it also impact the the same-store sales growth as well. So that's my question. Thanks.

Jacky Lo -- Chief Financial Officer and Treasurer

Lillian, this is Jacky, maybe I'll answer your question on new builds and capex and then Joey can answer your question on same-store sales.

Joey Wat -- Chief Executive Officer

Yeah.

Jacky Lo -- Chief Financial Officer and Treasurer

Yeah, so before I go into the change in our guidance, let me just first reiterate our store opening strategy. I mean we do not chase after a specific number, but we try to remain agile to respond to new opportunities or changing circumstances. And our new store development is driven by opportunities to sustainably grow the business, while meeting our disciplined return requirement. And our new store openings depend on our site availability and also business performance. When we see additional opportunities, we'll definitely capitalize on those opportunities by a series of new store openings.

So as I mentioned on the last earnings call, a lot of the site availability will not be finalized until the second half of the year. And we typically have more visibility on the full year pipeline in the second half after our second quarter. So based on the pipeline we have visibility on and also our brand performance right now. We anticipate 800 to 850 new stores for the year, up from the 600 to 650 we previously guide.

But keep in mind that COFFii & JOY was not included in the regional guidance. And so we are including our coffee brands, our store openings in the revised target. So for COFFii & JOY, we expect at least 50 this year. And also the incremental stores, they will be coming from multiple brands, but majority will be KFC. And our development team, they have shown very strong capability to open over 800 stores, we actually did that last year, but I will remain tactical without sacrificing our disciplined profitability standard.

And in terms of the capex questions, so that -- let me give you a breakdown. So we expect about $475 million to $525 million for the full year. And we have spent 212 so far in the first half. So in terms of breakdown, including the 800 to 850 new store builds, also the store refurbishment, including the 500 Pizza Hut stores that we talk about, also technology investment and also selective real estate purchases, for example logistic center, our restaurant sites and offices. So over the years. I think as you point out, we have successfully opened more -- like smaller store format and also in the process we lower the new store and remodel per store capex as well. And we also improve a lot of store opening and remodel efficiency. And also, there are a lot of numbers, a lot of factors like timing and capex for remodel and all the other projects like technology or real estate. So after considering all this that's why we expect to move into the final capex total that we are providing to give the guidance right now.

Joey Wat -- Chief Executive Officer

Thank you, Jacky, Lillian, thank you. For the new stores particularly for KFC, the majority of the new store will be from lower-tier cities deal. Although, we continue to open new store in tier 1, tier 2 city as well, because China is just such a exciting, a huge market that the growth is everywhere. But it's simply because the fact that we have already have more stores in tier 1, tier 2 cities. So now we are pushing to the lower-tier cities.

And you're right to point out that we are quite open to the idea of the smaller stores now as well, it's not only the top-tier city in the lower tier city as well. Smaller stores or lower capex that comes hand in hand, which also think about that smaller store also have smaller operating costs and that helps the success rate for new store opening as well. Because our new store opening other than what Jacky has mentioned is also a function of our sales. We don't have the luxury of opening the store for the sake of opening store, we want to open profitable store. So with -- improve the sales and also with a better controlled capex, our success rate is a bit more predictable then we become more aggressive with new store openings. So it's all the very positive cycle going on right now.

Now when I come to the same-store sales question, it's a bit different between KFC and Pizza Hut, let me start with Pizza Hut. The Pizza Hut as Jacky mentioned, we're going to have 400 store remodeling and the biggest cause of remodeling other than the capex actually is the lost sales, all the loss same-store sales. So we have to put into equation, but it's absolutely the right thing to do and the theme of Pizza Hut is always since in the last two years, but it's always about doing something very fundamental, very important for our long-term growth of the business, but a bit painful right now or quite a bit painful for the time being.

So the remodeling is one example. So that will put some pressure on the same-store sales. And then KFC, because we have fortunately, we have gone a long way to remodel more than 80% of our stores in the last few years. We have get that challenge out of the way, now we are moving to new store opening or even more new store opening, that's fantastic. But the but is when we open new store, of course, there will be sales transfer. And the sales transfer indeed is a bit more in the lower-tier cities, then the higher tier city, simply because against the store based in lower tier city is less and then the market is still maturing. So, there will be some sales transfer. So that is the slightly dynamic on the same-store sales. Thank you very much, Lillian.

Lillian Lou -- Morgan Stanley -- Analyst

Thank you, Joey and Jacky.

Operator

Thank you so much. And our next question comes from the line of Chen Luo from Bank of America Merrill Lynch. Chen, your line is now open.

Chen Luo -- Bank of America Merrill Lynch -- Analyst

Hi. Thanks. Hi, thanks you, Joey and Jacky. I have got a follow-up question on same-store sales growth. We understand that because of high lap and other reasons such as salary, new store expansion we expect the same store sales growth for KFC to moderate in second half. But if you look at the Q3 trend, in fact last year Q3 it's not -- it's not that high, but we still think that same-store sales growth in second half going to moderate. Is there any other reason -- just now here Jacky mentioned, we are going to be more productive with promotions in second half. So that suggest from second half we are going to take a more balanced approach between same-store sales growth and margin for the KFC. And also a relative topic is on the quarter-to-date trend. I know that we are not offering the guidance of the quarter-to-date trend, but we do notice that the company has reduced a lot of new products recently, including the one product, which have already actually read a lot of attention among the local social media. Can we actually get more color on the new products pipeline Q3 and the impact on the sales trend. Thank you.

Joey Wat -- Chief Executive Officer

Okay. Luo Chen, the line is not fantastic. So I just want to make sure that I got your question, the first question is about the same-store sales for KFC in Q3, your question is the base last year was not so high, why we say we guide the moderate sales growth. And the second part of the question is the -- the comments of the new product because of many media attention. So these are the two questions, I've got it right?

Chen Luo -- Bank of America Merrill Lynch -- Analyst

Yeah, yeah, I'm sorry.

Joey Wat -- Chief Executive Officer

Okay, thank you, one at at time, OK? When we look at the sales growth, same-store sales growth, we look at two years. So 2018 Q3 the same-store sales is -- was 1%, but 2017 it was 10%. So if we look at the last few years is very high base. So that's the number, the two years number. And on top of that the second half of last year because of the high base and we -- well, the 1% come growth kind of gave our team a bit more challenge that pushed us to further -- to push for more marketing innovations and that's the way our team work these days.

So with the extra challenges and push, we came out with some pretty amazing value program such as the Crazy Thursday and Scream Wednesday -- for Pizza Hut Crazy Thursday, for KFC. And the value focus on one day and amount of food or the amount of innovative food that we can sell to customer and cross sell, et cetera, et cetera, was fantastic. And thus all the good results bringing to the Q4 and then this year. So to lap the last two years to three for this particular year is actually very challenging. And thus we are sharing with our shareholders. When I come to the new product is very exciting, KFC is not only above QSR Western food, it's just above good food, is a wonderful restaurant platform, there not only you get good food, good coffee, good drink, good breakfast fantastic delivery, there's nothing more to sell very good fusion food as well.

For Q2 I'll talk a little bit about fantastic product such as the double chili chicken, which is [Foreign Speech] in Chinese that really come from a very famous dish called [Foreign Speech] chilli fish head is the same familiar flavor that we put into chicken. And that of course was very, very popular, but that's passed. Coming to Q3 of course, we are going to push out even more products. I cannot say too much for the second half of the year, because we -- for whatever we've been selling of course you've been eating it already, it's cool. But for those we have not launched yeah unfortunately this is China, if we see I don't know how long would it take smaller competitors to launch a product ahead of us, given the much smaller scale.

So, unfortunately I can't -- but I can give a little bit of example, for example, other than the exciting chicken, we always have very exciting new flavor chicken. For the second half of the year, we'll launch Okayama Peach ice cream right, it's just a bit specific. But that's the theme, so for the second half similar exciting ice cream and then the chicken and then burger, we'll continue the burger line as well. So we have a lot of exciting and successful LTO for the first half of the year and we will consolidate a learning and along the similar theme because this is quite predictable. Once you've got the theme, you know what this is what customer want and then we do more variation and this is quite so predictable threat that we can pursue to make sure we offer something very good for the customer and yet it's different.

So burger is under the line. We launched premium burger basically the import beef burger and salty yet shrimp burger. So these burger are still at RMB25, we never sell burger at such high price. RMB25 is very high price that we price, but they were very popular and guess what we're going to continue. We continue -- we'll continue the LTO then it might have a chance to get our permanent menu. So a lot of amazing product coming. We have typically have 12 months pipeline already in our plan because given the scale of the business, if we don't have the plan ahead, we are not doing a good job.

Similar idea for Pizza Hut, but the pipeline for Pizza Hut is coming just to advertise Pizza Hut. This week we are selling Canadian snow crab pizza, it's fantastic. So when I get to talk about product I got very excited, so thank you lot.

Chen Luo -- Bank of America Merrill Lynch -- Analyst

Okay, Thank you, Joey and Jacky.

Operator

Thank you so much. And our next question comes from the line of Sara Senatore from Bernstein. Sara, your line is now open.

Sara Senatore -- Bernstein -- Analyst

Thank you. I've got a question about delivery sales. I think you pointed to it a couple of times as a headwind for margins, but if I look at your delivery sales mix, it's been pretty stable at Pizza Hut in the mid 20% for the last six quarters and it seems to be stabilizing in the high teens at KFC brand just for a couple of quarters now. So I guess I'm trying to understand what gives you confidence that it will continue to grow these sales driver. And then conversely, is there a potential that your margin guidance is conservative, because we are in quite the rapid mix shift toward delivery that you had seen in perhaps recent quarters. Thanks.

Joey Wat -- Chief Executive Officer

Okay. Let me talk about the sales and Jacky can talk about the margin. The delivery itself is very exciting part of the business. So, KFC first and then Pizza Hut. So let's say if KFC delivery is a stand-alone business, actually by the end of this year is likely to be a business with probably USD1 billion revenue -- $1 billion revenue that if KFC deliveries at stand-alone business. It's growing very, very nicely.

And right now we have more exciting learning about delivery for the first half of the year, not only the own channel growth is growing faster than the aggregator. So KFC the own channel -- the traffic from our own channel is already over 40%. And that's very exciting, because we are actually driving the business our self through our own app et cetera. On top of that when we look at the growth of breakfast, the coffee, late night or even dessert, it becomes very powerful when we combine the digital database knowledge about these particular category with delivery. So we can use delivery to drive the growth of these new category on new dayparts, not new like emerging growing daypart. So when we look at the digital split of the business, the CRM business when we sell the subscription membership, we combine profit and delivery, we combine coffee and delivery. So it's not only growing very nicely, but it's also growing other daypart as well. Therefore, for KFC, the delivery sales is really fantastic and it will be as I state -- in the foreseeable future it will continue to be a very important part of our business.

And and all of these growth of course have something fundamental underneath, that's called the building blocks. The fundamental building blocks with our riders, with our management or trade zone, et cetera, et cetera. So that also explains the difference of growth of Pizza Hut, because Pizza Hut only by late last year we took back the last mile delivery. And right now, we are still working on the building block of the Pizza Hut delivery business. So it's a bit -- not late but a bit behind the KFC core capability -- the delivery core capability.

So Pizza Hut, we are working on the fundamentals and we understand is painful in the short term, but it's absolutely right thing to do, but it's still growing very nicely. And again the growth from our own channel is still growing much faster than the aggregator. The percentage of the sales from Pizza Hut own channel was 20% before, but now it's more like 27% -- is 6% to 7% growth compared to the quarter before. So we are happy with the progress as well in terms of the pizza delivery or most of it's margin.

Sara Senatore -- Bernstein -- Analyst

Okay. Thank you, Joey.

Jacky Lo -- Chief Financial Officer and Treasurer

Sara, on your question on delivery on impact on margin, well, first of all as Joey mentioned, it's a key growth driver for our business and because it's growing so fast, it actually generates incremental revenue and profit at this point. And so we look at delivery as a long-term growth trend for the industry. And from our perspective, we always talk about like the future of the restaurant business, it will be a combination of offline assets and online system. So in a way, delivery and dining they are two inseparable segments of the same business. But if you look at the dining and delivery business separately, so from a cost perspective, so there additional like rider costs, packaging costs, these are incremental for delivery, but we also receive our delivery fee to offset that. But overall, it's still slightly margin dilutive to the -- versus dining. So -- but we are looking at initiatives to improve the efficiency and lower the rider costs. So for example, we roll out the dispatch 3.0 system. So, we are testing the trade zone based delivery right now in certain cities. And toward the end of the year, we'll also test may be sharing the delivery across multiple brands. So these are all the ways that naturally will improve efficiency and lower the cost on margin, but at this point, delivery is still slightly margin dilutive to the business.

Joey Wat -- Chief Executive Officer

Thank you.

Operator

Thank you so much. And our last question comes from the line of Christine Peng from UBS. Christian, your line is now open.

Christine Peng -- UBS -- Analyst

Hi, management, I just have very quick question regarding Pizza Hut. So Jacky you mentioned earlier that you're expecting Pizza Hut profitability to go back to the pre-revitalization level. So given the turnaround for Pizza Hut they're happening for two quarters, so should we expect this kind of profitability for the year of 2019 or 2020? Just want to get a clear idea as regard to the timetable for Pizza Hut to go back to the previous profitability. Thank you, management.

Jacky Lo -- Chief Financial Officer and Treasurer

Yeah, Christine. We actually touched on this during the Investor Day as well. We never really put a timetable on it. I mean we talk about is the step-by-step process for the revitalization of Pizza Hut. So the first step is stabilizing traffic and then we will drive sales and the last that will be profit. So in the first half, yeah, that's year-over-year increase in the margin, but I already talked about some of the headwinds earlier. So we have all these remodeling. So we are lapping a lot of labor initiatives in the second half. So, and right now the focus at least for this year and next year we will still invest in value propositions to drive traffic and sales. So that's the immediate focus for the brand.

Christine Peng -- UBS -- Analyst

Thank you.

Florence Lip -- Senior Director Investor Relations

All right, operator. Thank you very much. Thank you everyone for joining the call today. We look forward to speaking with you again. And that concludes today's call. Have a great day. Thank you very much.

Joey Wat -- Chief Executive Officer

Thank you all.

Jacky Lo -- Chief Financial Officer and Treasurer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Florence Lip -- Senior Director Investor Relations

Joey Wat -- Chief Executive Officer

Jacky Lo -- Chief Financial Officer and Treasurer

Michelle Cheng -- Goldman Sachs -- Analyst

Xiaopo Wei -- Citigroup -- Analyst

Michael Tamas -- Oppenheimer -- Analyst

Lillian Lou -- Morgan Stanley -- Analyst

Chen Luo -- Bank of America Merrill Lynch -- Analyst

Sara Senatore -- Bernstein -- Analyst

Christine Peng -- UBS -- Analyst

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