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Yum China Holdings, Inc. (NYSE:YUMC)
Q3 2019 Earnings Call
Oct 30, 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 Yum China 2019 Third Quarter Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded.

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

Florence Lip -- Senior Director of Investor Relations

Thank you, Ra. Hello, everyone, and thank you for joining Yum China's third quarter 2019 earnings conference call. Joining us on today's call are Ms. Joey Wat, CEO of Yum China; and Mr. Andy Yeung, 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 includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures and reconciliation thereto.

Today's call includes four sections. First, Joey will cover Yum China's third quarter 2019 highlights, and Andy will cover the financial results before Joey provides an update on our strategic priorities. We will then open the call to questions.

The webcast of this call will be available on our IR website. A PowerPoint presentation, which contains operational and financial information for the quarter is available for download as well.

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

Joey Wat -- Director and Chief Executive Officer

Thank you, Florence. Hello, everyone, and thank you for joining us today. Let's start with the overview. We are pleased with our continued strong performance and robust operating profit growth in the third quarter. We continue to build on our market-leading position in China and further strengthened our competitive advantages in the area of innovation, digital and delivery across the whole of our business.

Let me share some highlights from the quarter. First, we delivered our 12th consecutive quarter of system sales growth since spin-off, with positive same-store sales growth at both KFC and Pizza Hut. Second, we are on track to hit the high-end of our new store target of 800 to 850 for 2019. This is driven by the good performance of our brands, in particular, KFC, and the many attractive opportunities to expand our portfolio across China. Third, we continue to innovate on multiple fronts, this includes launching exciting new products and leveraging technology to drive sales and operational efficiency. We continue to see strong growth in our digital KPIs, including total members, members contribution to sales, digital orders, Privilege subscription and delivery sales.

I also want to formally welcome Andy Yeung, who has recently joined as our new CFO. Andy brings a wealth of finance experience, specifically given his tenure serving as CFO in other companies, including a New York Stock Exchange listed technology company. I would like to thank Jacky for his leadership over the last several years and wish him all the best as he relocates back to Hong Kong to be closer to family.

With that, I would like to walk you through the third quarter performance. Let me start with the progress we have made on the digital and delivery front, as they are a crucial driver of our success. Maintaining our market leadership in our digital and delivery capabilities is a key component of our vision. To be the world's most innovative restaurant company, we continue to leverage our powerful digital ecosystem to drive sales, improve the customer experience and increase operational efficiency.

The bedrock of our success is our large and growing digital memberships. KFC and Pizza Hut together have grown by over a third in the last year to 230 million digital members and they account for half of our sales. Digital orders continue to grow materially as our customers embrace the convenience offered. Our Privilege subscription continued to be very popular. We have over 4 million sold during the quarter. Other than the delivery privilege membership, that you're familiar with, we launched several new attractive offers, including an updated coffee privilege program at KFC and stick privilege program at Pizza Hut aiming to drive adoption and stickiness of these categories, all are showing encouraging results.

Delivery continues to grow and now accounts for 20% of sales. With sales via our own channels growing faster than that by aggregators. We continue to try to improve efficiency and performance with the ongoing automatization [Phonetic] of our recently upgraded delivery dispatch system and the rebuild of our in-house Pizza Hut capabilities. In addition to the digital and delivery initiatives, we have also leveraged technology to improve our operational efficiency. For example, in improving our real-time monitoring and management of our supply chain and labor productivity.

Now, let me walk through the performance of our key brands, starting with KFC. KFC reported another strong quarter with system sales growth of 10% and same-store sales of 3%. We delivered margin expansion and operating profit growth of 16% in constant currency, despite the slightly moderated sales growth compared to the first half of 2019. This is the result of lowering the intensity of promotional activities, which we highlighted last quarter. Strong management of the chicken cost increased improvement in labor productivity.

Let me provide some detail about these initiatives starting with our menu innovation. For menu, meeting and exceeding customer wishes for new and improved products has always been our focus. To this end, we launched several exciting burger LTOs during the quarter. We offer our first vegetarian burger, a premium price point portobello mushroom burger, showcasing our protein innovation capabilities. The Double Down bunless chicken burger is an example of a popular KFC product launched by Yum Brands internationally that we were able to leverage and launch in China.

Aside from burgers, we launched an exciting new trial of Spicy Skewers and stew pots, [Foreign Speech] intensities and we are gradually expanding the coverage. Spicy Skewers, Sichuan flavor street food, particularly popular for late night dining.

Lastly, we drove strong sales growth in our key categories of breakfast, coffee and dessert with exciting new products and captured cross-selling opportunities enabled by our digital memberships. We have witnessed our Privilege members more than double their spending during the subscription period, driving incremental operating profit. For example, our coffee marketing has been primarily driven by digital initiatives and we have sold 98 million cups of coffee in the first nine months of the year, exceeding the total sold for full-year 2018.

With respect to promotions, we continue to focus on smart value. Our signature value promotion, Crazy Thursday, continued to grow sales above the results from last year's successful campaign. As we adjust our offer, we were able to increase average ticket and improve margins.

Next, allow me to spend some time describing our approach to cost management. The team has done an excellent job of managing the impact from commodity inflation, in particular, the recent increase in chicken prices. This has been achieved through a combination of, one, leveraging our scale and long-term relationships with our suppliers, to negotiate lower than market increases; and two, focusing our menu innovation capabilities on optimizing the mix of chicken products used and diversifying away from chicken through the introduction of new non-chicken menu options.

On labor, we drove strong year-on-year productivity gains during the quarter. This was due to careful planning for peak summer staffing and new real-time automated labor management tools. These tools were particularly effective in optimizing management of the seasonal labor demand during the peak summer season.

To conclude, during the quarter, we strategically lowered our promotion intensity and drove double-digit system sales growth through our menu innovation, digital and delivery initiatives and new store openings. Despite the pressure from ongoing elevated chicken prices, our diligent cost control enabled by our scale and improved labor productivity, allowed us to drive excellent operating profit growth. This was a successful execution of the short-term strategy we outlined last quarter. The results highlight our resilient business model and ability to adapt effectively to changing market conditions in China.

Our long-term strategy for KFC remains unchanged to continue to open stores across China and innovate across the business to serve our customers' evolving demands, while maintaining a strict focus on efficiency.

Next, I'll provide some color on Pizza Hut's performance. Pizza Hut continues to cement the progress being made in its revitalization program with near-term priorities on driving traffic and sales. We achieved our third consecutive quarter of same-store sales growth and fourth consecutive quarter of traffic growth, led by a significant increase in dining traffic. Our crucial investment in revitalizing the brand has impact our operating profit in the third quarter. However, we are focused on the long-term and believe we are doing the right things for the successful revitalization of the brand. Short-term flexibility is required to achieve our long-term objectives.

Let's talk about the four pillars of our revitalization program. Starting with fixing the fundamentals, which is really about getting our menu, promotions, operations and service right. For our signature Scream Wednesday promotions, we introduced new offers on items like appetizers and desserts. Various additional promotions were targeted directly to our customers via our digital memberships. We have seen good consumer response both in sales and consumer survey results. We also launched various new products, such as seafood platters and Chinese taste double chili chicken pizza. Steak remains an important growth category. Sales of stake was up strong double-digit year-over-year to account for above 13% of sales. To give you an idea of scale, this amounts to over 30 million serving of steak during the past 12 months.

Turning to our second pillar digital. In addition to the achievements I mentioned at the beginning of the call, we launched a national test of our carry out function on our Super App and see great potential from promoting this efficient off-premise dining opportunity.

Delivery, our third pillar grew to 26% of sales. This has been powered by strengthened operations as we rebuild our in-house delivery infrastructure. Overall delivery growth has been driven by our channel -- our own channels, thanks to our successful digital CRM program and dedicated promotions.

Lastly, we are enhancing our asset portfolio, both through accelerated remodels and multiple store formats. You can see our beautiful stores on Slide 19 of the presentation. We remodeled 126 stores in the third quarter, a significant increase in pace compared to the first half. We will continue to accelerate the pace aggressively in the fourth quarter and target to complete above 500 for the full year. Together, these four pillars are having a very positive impact on the business. Moving forward, we will maintain focus on these four pillars to drive the long-term restoration of traffic, system sales and then profitability. We will continue cementing our positive changes along the way, while anticipating quarterly fluctuations as we continue to invest and adjust appropriately as the revitalization matures.

Finally, we announced in August an agreement to acquire controlling interest in Huang Ji Huang, a restaurant chain focusing on simmer pot [Foreign Speech], a subcategory of hot pot. Huang Ji Huang has over 640 restaurants, almost all of which are franchise-operated. We will provide additional details once the deal is completed. Currently, expected in early 2020 subject to the satisfaction of closing conditions.

With that, I will hand over the call to our new CFO for the first time, Andy.

Andy Yeung -- Chief Financial Officer

Thank you, Joey. Good day, everyone. Thank you for joining us today. I'm very excited to have joined Yum China recently. I look forward to meeting with everyone in the coming months.

Now, let us turn our attention to the third quarter financial results. Total revenues reached $2.3 billion in the third quarter of 2019, up 8% year-over-year excluding foreign exchange translation. Total system sales grew 8% year-over-year, excluding FX, driven by same-store sales growth of 2% and new store openings.

We opened 231 new stores during the quarter, increasing our total portfolio to 8,917 restaurants as of the end of September. We have opened 646 restaurants year-to-date and are on track to hit the high-end of our target, which is 800 to 850 new store openings for 2019.

KFC same-store sales grew 3%, driven by a 4% year-over-year increase in ticket average. This was due to increased share of delivery, lower promotional activities and increased pricing. Traffic decreased 1% year-over-year, primarily due to few value promotions.

Pizza Hut achieved its third consecutive quarter of same-store sales growth of 1%. Traffic increased 6% year-over-year. We remain positive for both food dine in and delivery. This was largely driven by increased promotional activity year-over-year, which also drove a 5% year-over-year decrease in ticket average.

Overall, Yum China restaurant margin was 17.7%, slightly up compared to the same period last year. Wage inflation was 5%, while commodity inflation was 2% compared to the same period last year. We continue to expect overall commodity inflation to be low-single-digit for 2019.

KFC restaurant margins increased 0.9% year-over-year to 20.1%. It was driven by sales leverage, low intensity of promotions and excellent management of core sales and labor productivity during the critical summer peak season. Combined, this more than offset margin pressure from wage inflation and commodity inflation.

Finally, the margin also benefited from a one-time adjustment during the quarter. This is related to tariff rebate that added approximately 0.3% to the margin.

Pizza Hut margins during the third quarter was 11.4%, down 2.4% year-over-year. The margin pressure was primarily due to: one, our investment in higher promotional activities to drive traffic; two, acceleration of remodels; and three, ongoing wage inflation. Partially offsetting these factors were savings in commodity costs, as we leverage our scale and optimize product offerings. However, we begin to lap some very successful initiatives, that were implemented during the second half of 2018. The significant year-over-year savings in labor productivity, as seen in the first half of 2019, were not repeated in the third quarter. But net-net, year-to-date, Pizza Hut margin are still slightly above last year levels, a strong achievement given the long-term investment being made to revitalize the brand.

G&A expense was up 3% year-over-year and 7% year-to-date ex-FX. The third quarter benefited from higher capital incentive in part due to some incentive received in the fourth quarter last year, but we've received it some in the third quarter this year.

Yum China operating profit for the third quarter of 2019 increased 11% year-over-year. Now, due to depreciation of RMB against US dollar, foreign exchange translation negatively impacted our total operating profit by $9 million, or 3% during the quarter. Excluding FX, operating profit [Technical Issues] 14% year-over-year.

Our effective tax rate during the third quarter was 26.9%, 2.7% higher than the same period last year, primarily due to higher accrued residual US tax. 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.

Finally, diluted EPS was $0.58 in the quarter compared to $0.51 in the same period last year. Diluted EPS includes a mark-to-market gain of $12 million or $0.03 per share from our equity investment in Meituan.

Next, let me cover capital allocation. Our strong cash flow generation continued in the quarter. In the first nine months of 2019, we generated more than $1 billion net operating cash flow and $735 million free cash flow after subtracting $310 million in capital expenditure.

In the third quarter, we returned $109 million to shareholders, including a cash dividend of $45 million and share repurchase of $64 million. At the end of September, there was roughly around $750 million remaining under the share repurchase authorization. Our quarterly dividend remains at $0.12 per share and we will continue to review our dividend policy in conjunction with the Board quarterly.

We will continue to invest for growth, given the strong returns for new builds. However, with tremendous effort in optimizing new store and remodeled CapEx, we now expect full-year CapEx for 2019 to come in at the low-end of our $475 million to $525 million range, including the expected impact of currency translation.

Now, I would turn our -- turn to our outlook for the fourth quarter of 2019. While we continue to drive sales across all of our brands, we are facing some tough comparisons as we begin lapping some very successful sales initiatives that started in the second half of 2018. Also, we will step up investment in various important areas to ensure long-term vitality of our brands, including a focus on remodel, which will be back-end loaded in 2019.

It is important to note that the fourth quarter is not only seasonally the lowest quarter for sales, but also the biggest quarter for store remodeling for us this year. So small changes in operating result, while investments can have a significant percentage impact on operating profit for the quarter.

Turning to specifics for KFC and Pizza Hut. At KFC, there are some very successful sales initiatives implemented in the fourth quarter of 2018, including the first full quarter of Crazy Thursday. The lapping of this successful initiative and our strategic decrease in promotional intensity to protect margins are expected to result in a moderation of sales growth in the fourth quarter. We will continue our relentless effort to manage margin pressure from continued elevated chicken prices. Also, investment in remodels are expected to increase year-over-year. This will impact sales and margins in the short-term, but it's an important investment for our long-term success.

Finally, several one-time benefit in the third quarter, in particular the tariff rebate and significant year-over-year increase in labor productivity are not expected to carry forward into the fourth quarter.

At Pizza Hut, we are very encouraged by the progress of our brand revitalization program. But we do expect quarterly fluctuations as we roll-out our initiatives at scale. We will be driving this via value promotions. In addition, our remodeling program will ramp up with approximately half of our full-year program to be completed in the fourth quarter. Again, these initiatives will impact the restaurant sales and margins in the short-term but are important component of the long-term revitalization of our brand.

Now, let me hand the call back to Joey to comment on our current strategic priorities. Joey?

Joey Wat -- Director and Chief Executive Officer

Thank you. Thank you, Andy. I wanted to take a few minutes at the end of the call today to highlight our overall strategic priorities. In short, we are focusing on a number of key areas that will drive our long-term growth. First, we will focus on expanding our core brands, KFC and Pizza Hut. In the near-term, as Andy mentioned, we have a very busy investment program in terms of both remodels and new builds in the fourth quarter. In 2020, we expect to open stores at a similar pace compared to 2019.

Second, we will continue to invest in key growth opportunities, including our smaller brands. We expect to accelerate the store openings of our smaller brands, in particular we'll be increasing our investments in expanding our presence in the coffee category. We believe coffee has a bright future in China, but it would take additional patience, hard work and investment to fully realize this segment opportunity within our diversified portfolio.

Third, we will leverage, and increase our investment in our industry-leading digital and technology capabilities. Fourth, we will be vigilant on controlling costs and driving efficiencies to protect margins. That being said, given the current pressures across the protein supply due to poor shortage, we anticipate 2020 will be another challenging year for commodity inflation. We will be prudent on the portion of these causes pass on to our customers, particularly for Pizza Hut. We will continue to build on recent gains made in our value for money perception. We will provide additional details on specific 2020 target with our Q4 earnings release in early 2020.

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

Florence Lip -- Senior Director of Investor Relations

Thanks, Joey. We will now open the call for questions. In order to give as many people as possible to ask [Phonetic] questions, would you please limit your questions to one at a time.

Operator, please start the Q&A.

Questions and Answers:

Operator

Thank you so much. Ladies and gentlemen, we will now begin the question-and-answer session. [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. Congrats for the very good result, especially KFC, in such a competitive and high-potent coffee inflation market, we still deliver strong margin improvement. But can you please give us some color about the chicken cost increase in the third quarter or year-to-date? And I believe you probably have some visibility on the first quarter's cost trend. Can you also share with us? And given we have such a strong product innovation and cost efficiency, can we have some idea about how should we look at the margin trend into next year for KFC? Thank you.

Andy Yeung -- Chief Financial Officer

Okay. I will take this question. This is Andy. So regarding overall commodity price inflation, I think it was 2% in the third quarter for us and about 3% in the first half this year. For full-year, again, we expect that to be at low-single-digit. I think also this year we've seen significant price increase in protein in China, driven by the African swine flu and that is likely going to continue. But commodity prices are volatile so it's hard to predict going forward.

Chicken prices, as far as we know, up almost 20% to 30% year-over-year in China this year. For us, because we have very strong supply chain and procurement management, so we are able to manage that significantly below that. And in fact, we have probably managed that below 10% this year.

In terms of commodity prices, again, it's very hard to predict because if you look at spot prices, for example, in September, I think it reached new record, up almost 60%-plus year-over-year. So, I think we will continue to monitor situations and keep you guys updated. But again, I want to mention that our team have done amazing job in mitigating the impact of elevated chicken price inflation through several initiatives, supply chain relationship, leveraging our scale and long-term partnership with our suppliers. And then our team also have tremendous product innovation creating products using our partner [Phonetic] chickens and also non-chicken protein choices. So, we have been able to manage that commodity prices quite well this year.

And so, you think about this, with all the effort, the impact will be more significant. So chicken is about 4% of our cost of sales and it have increased by 20% to 30% this year. So that would normally mean 8% to 12% commodity inflation, just from chicken alone. And about like 2.5% to 3.5% impact on our margin. Obviously, we haven't seen that kind of impact on our overall margins and CSO [Phonetic] increase. So hopefully, our team will continue to be able to do a good job in managing that pressure as well.

Joey, any?

Joey Wat -- Director and Chief Executive Officer

Sure. I just want to add two comment, Michelle. One is, we are excited and committed to our vision of becoming the most innovative restaurant company in the world. So, in this facing the challenge of chicken price hike, we suddenly take this vision even more serious than otherwise it would be. So for Q3 alone, we have some really exciting new products like the portobello mushroom burger, which is we replaced the meat with the entire piece of portobello mushroom with cheese in the middle. We have the duck wrap instead of -- other than chicken wrap that we traditionally have, we have that duck.

We also in our combo, start to introduce chicken strips to replace chicken wings. So, although it's still chicken but the cost on chicken strip, which essentially breast meat, which is not very popular among the Chinese customer. The price of chicken strips is lower. So, our product innovation will continue for the rest of the year and going forward for next year, and it's very exciting. We even get to the point of selling a lot of [Foreign Speech], which is the last small tip of the chicken wing, which is not something you think that we can sell, but we could because there are a group, not huge group, but there's still a group of people who just love it. So that's point one.

Point two is our commitment to good food. If we look at our cost structure, let's say, we'll take Pizza Hut. We can see improvement of the cost management in almost every line, but we leave the flexibility to cost of goods -- cost of sales. Why? Because it's our commitment. We would push ourselves to drive efficiency and effectiveness in everything. However, we have the commitment to pass all the savings better food to serve our customers. [Foreign Speech] Even though we are big business, but we need to have that sincerity and good food is sincerity to a customer and we have the commitment and thus, we always have the flexibility there in terms of the investment to food. But we must have the good product first to drive good traffic and increase sales.

Thank you, Michelle.

Michelle Cheng -- Goldman Sachs -- Analyst

Thank you.

Joey Wat -- Director and Chief Executive Officer

Yeah. I think I'll answer -- sorry. I think I'll answer the same question -- same part of questions, which is about the margin trend for KFC. I think there are couple of things, right? One is that, I think in the fourth quarter, as we mentioned before, we are going to accelerate our store remodeling. So that would have an impact on our sales and margins. And also, if you look at KFC, right, also benefits from some one-time items, including the tariff rebate, which impacted -- benefited the margin by 0.3% and then also -- we also benefit, as Joey mentioned, a very successful roll-out of some of our productivity, too, especially in the summer peak season. We are gaining a lot of productivity improvement, and that may not be as prominent in the fourth quarter, which is traditionally a smaller quarter and not season for us.

So, in overall, I think also for the sales, also if you look at KFC, we'll be lapping some very successful initiative, right? We have the first full quarter of Crazy Thursday that rolled out in 2018. So that will be a tough comparison lapping that. So all in all, I think for margin trend, we have done a great job and I think better than we have expected probably in the third quarter and I think we will normalize more in the fourth quarter.

Michelle Cheng -- Goldman Sachs -- Analyst

Thank you.

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

Thank you, management. I've got a question on the sales. Just now Andy mentioned that we expect moderation of sales growth in fourth quarter. Are we talking about the slowdown of same-store sales growth as compared with Q3? And we also highlighted that in Q3, we have a purposely scaled back the promotional intensity to achieve a balance between margins and same-store sales growth. But going forward, we are going to see very tough laps of same-store sales growth. Are we going to continue with this balanced strategy? Or if necessary, we are going to actually step up promotion again to sustain same-store sales growth? Any color on that front will be helpful. Thank you.

Andy Yeung -- Chief Financial Officer

Thank you, Chen. So, yes, you're right, like so if you look at the third quarter, the margin improved at KFC partially due to the strategic management of promotional activities. So, again, I think our team will continue to look at balancing between promotional activity versus protecting margins and respond to the market appropriately. And so -- but we do expect that selective in promotional activities is likely in the fourth quarter for KFC. So hope that answers your question.

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

Yeah. Okay. Thank you.

Joey Wat -- Director and Chief Executive Officer

I think Andy just mentioned a bit earlier is, we just have to remind ourselves that quarter four last year for KFC was very strong. That's the first full quarter of Crazy Thursday, which is one of our best promotion now. And with that strong result, naturally, we will have the challenge of lapping this year for the Q4. But at the same time, as we mentioned a few times already, given the cost pressure, particularly in Q3 and looking at Q4, we also look for ways to protect our margin as well.

The third point is same-store sales really is not the only criteria for Yum China, despite the scale of our business, we are still growing very fast and the market opportunity is still very exciting there. We will not be doing something good and fair for our shareholders, if we do not have a good balance of same-store sales and system sales growth. So, if we look at Q3, for KFC, the same-store sales is 3%. But the system sales is 10%, which is fantastic, given the scale of our business already. So Q4, as Andy mentioned, we -- while we are driving the same-store sales, this is also a very big quarter for us to build new store, and we must keep this pace going to maintain our dominant market leadership in our business. So therefore, you can see the balance consideration from management team's point of view toward Q4.

Thank you, Luo, Chen.

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

I understand. Thank you very much, Andy and Joey.

Operator

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

Xiaopo Wei -- Citigroup -- Analyst

Good morning, Joey. And Andy, welcome to the Company. And I have one question to -- regarding the new openings. And as you mentioned on the release that you accelerate opening in the third quarter. Interestingly, we are seeing very impressive improvement in KFC restaurant margin. Shall we see actually the new store restaurant margin on like-for-like basis actually is better than last year because we are seeing, you are opening more stores. Looking forward, shall we say that the drag of the new store looking forward on a like-for-like basis actually will be much less than previous years? Because I'm seeing the trend that your top line is more driven by the new opening looking for rather than the same-store. If your restaurant margin for the new store, it is better than previous years, shall we see that as the margin pressure will not be as much as we feared by normal operation? Thank you.

Joey Wat -- Director and Chief Executive Officer

Thank you, Xiaopo. Let me take this question. For the Q3 restaurant margin, there are few contributing factors. One is, Andy mentioned earlier is, there are some one-off benefit like the tariffs rebate like the government incentives that was happening in Q4 last year. This year it moved to Q3. But more importantly, actually, we have some very impressive labor productivity gain during the Q3. I mean, that number is big and that number is from all stores, and the reason behind it and the cost does not go down, but usually, it's a result of very aggressive and how -- aggressive management and hard work behind. So the hard work behind the -- all store labor productivity and thus, restaurant margin is our new real-time automated labor scheduling system in place.

So right now, for all my store managers in KFC, they -- the data of the operational detail, particularly for labor scheduling is real-time and is in their phone. We call it [Foreign Speech], the manager in your pocket. So, the transparency of the data and then the automation of the labor scheduling give our store manager a very good tool, so that they can respond and react immediately. And this particular benefit is very, very important and it was proven in our Q3, which is our peak trading season for the summer, right, is very, very significant. And thus, Andy also mentioned earlier that, such benefit is less likely to replicate in Q4 because Q4 is a very small quarter. So when we spend a lot of money on labor costs and the saving, there is slightly more impressive.

So the restaurant margin really is -- the improvement is a result of all store margin, not only new opening. But all our new opening store, we do have a bottom-up approach. Each store -- the decision to open one single store, any store in Yum China, we have very robust process to approve it. However, when the new store mature, then we are expecting a bit more benefit from it as well.

Thank you, Xiaopo.

Xiaopo Wei -- Citigroup -- Analyst

Thank you, Joey.

Operator

Thank you so much. And your next question comes from the line of Anne Li [Phonetic] from Jefferies. Anne, you may now ask your question.

Anne Li -- Jefferies LLC -- Analyst

Hi, management team. Hi, Joey, and also, Jack [Phonetic]. I have a question regarding Pizza Hut. Pizza Hut with all these like promotion, we noticed that, not only in the Scream Wednesday but also like Scream Monday, Tuesday and Wednesday for some of the weeks in third quarter. So is that 1% same-store sales, like up to management's expectation?

And we also see that in our margin a little bit more volatile, I think we can understand that. But like what do you think that in terms of restructuring Pizza Hut, what is still missing? Is it more like -- in the four pillars, which one will be the one that you want to highlight a little bit more about?

Are you happy with the current ASP for Pizza Hut? If not, what is -- what are the trends?

And maybe just one follow-up question from -- on the Chen Luo's [Phonetic] question. Regarding the one -- you mentioned about the one-off cost -- one-off gains regarding the labor efficiency. Is it fair to say that, although it happens in the third quarter, it might not be that impressive in 4Q? This efficiency will come back again in first quarter and third quarter next year because it's a high season? Thank you.

Joey Wat -- Director and Chief Executive Officer

Thank you. Thank you, Anne. Yeah. There are quite a few questions here. Let me try to start with the big picture. For Pizza Hut, we are very happy with the third quarter of same-store sales growth. And then also the consecutive fourth quarter of traffic growth, which is the first time we achieved since 2014. And then the year-to-date margin is actually 12.4% versus last year 11.8%. So, with all the good efforts going in, despite the seasonal -- despite the quarterly fluctuation, we are very happy with the overall trend. So comes to the same-store sales growth, is it in-line with our expectation? We always want a bit more, if we could. But we are happy with the positive same-store sales.

And in terms of ASP, and all the four pillars that we are all familiar with, my thoughts are as follows. One is, it's very good for the business in the long-term when we are driving traffic, even when the ticket average or ASP is going down. What does that mean? It means that we are rebuilding value for money, which is absolutely critical for our business. So for our dine-in business, the trade-off is very obvious. And the result is impressive. We are increasing 10% TC and then TA go down 9%. That's what we wanted. That's good.

In terms of four pillars, I guess, the question, what else can we do more? The answer is, we continue to drive four pillars. But the focus will shift slightly along all four pillars, as well as we get something under the belt, we move onto the next thing that we can focus on.

Let me give you example, the fundamental. We are talking about menu, the product, the value for money, the layout, et cetera. So, all these fundamentals are good and we are very happy that the new menu that we introduced back in March, that there are only 77 items versus 120 before. What's different? The different is, this new menu continue through the rest of the year and that's very different because in Pizza Hut's history, we used to do two menus -- menu changes in the past, and that was a massive amount of effort, and this year we managed to have one menu, it carry us through for the whole year. That is good.

Now, what else that we need to do? Well, now we got the dine-in menu under the control that we are happy about. What about the delivery menu? So we are going to move our focus to fixing the delivery menu because the requirements are different. The dine-in menu need to be something very nice, very [Foreign Speech] for any -- that you can put on the video online, the cake -- the lava cake will flow down. It doesn't work for delivery. So we need to move on some menu items that can keep the heat, the temperature much better, that can come out from the kitchen much faster to help us drive the delivery business.

So let me also highlight, digital. The digital, we launched Super App 2017 and then, we will continue to roll-out the table side ordering, et cetera, and we're still trying it. So what is new this year? Well, we just rolled out the carryout ordering on Super App as well. The carryout ordering right now is still single-digit, it's still early stage, but it's fantastic because it does not take our space in the store, and it does not require delivery cost either. So, now we started it, and we need to push, and we need to get it right and then push the delivery.

I talked about the menu and we took back the last-mile delivery at the end of last year and we have spent massive amount of effort and work to rebuild the infrastructure. Okay? The infrastructure is rebuilt. Now we have to go to very detailed management of the trade zone. We are going through one trade zone at a time in the entire country where we have the delivery business and try to make it better to reduce the customer complaints. So that is the quality. And you can even see that delivery business coverage actually reduced from 97% to 91%. Why? So only 91% of our store right now offer delivery business instead of 97%. Why? It doesn't make sense. No, it does make sense, because we realized there are some stores, they're doing the delivery business at sub-optimal scale. So a few stores are close enough, we combine them, we still keep the sales but we improve the cost and we improve the quality for the customer. So as such, we have done 120 remodels in Q3, as Andy mentioned, we still have half of remodeling to do for the rest of the few months for the year, because it's low season. So, of course, we're going to work harder to prepare for next year.

And then the hub-and-spoke, we mentioned it in the Investor Day, this year and we now have plenty of them and we continue to test to fine-tune the hub-and-spoke model, and then hopefully, we can roll it out in bigger scale next year. So, as I mentioned at the beginning of this year when we turned the corner of achieving positive same-store sales, which is fantastic. But we also mentioned that the business is going to take another two to three years to cement all the changes.

The last bit of your question is for labor productivity for KFC in particular. So we have seen the good result in the Q3 this year. Next Chinese New Year will be the first Chinese New Year we will go through with our [Foreign Speech] with our real-time automated scheduling. And every fiscal peak season is like a big battle for us. We're starting to try our very best and the dynamic is different because although the Q3 is the peak trading season, Q2 -- the Q1, the Chinese New Year this year is Q1 actually because it's earlier. It's a completely different dynamic. It's going to be another lesson learned experience and we certainly we'll try our best.

Andy Yeung -- Chief Financial Officer

Well, I would add a little bit more to that. So, like if you look at the labor productivity improvement in the summer seasons, I think that's because during the summer peak season normally, we have a larger temporary crew. And generally, the labor productivity because of that is lower. But we have this near time almost automated labor scheduling tool, we're able to see significant improvement in labor productivity. Now, we continue to expect this to be helpful in improving labor productivity through the year. But, obviously, the lowest-hanging fruit for that is in the summer peak season, where labor demand and supply are more different. So hopefully, that addressed your question.

Anne Li -- Jefferies LLC -- Analyst

Okay. Thank you.

Operator

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

Lillian Lou -- Morgan Stanley -- Analyst

Thanks, Joey and Andy. I think a lot of question were answered. I have a follow-up question. I think so far, Pizza Hut is on a very good trend, as Joey mentioned, that positive traffic is very important metrics that we need to follow at this stage. So, in terms of balancing Pizza Hut and KFC rolling over 2020, I know it's still early to give exact guidance, but in terms of strategic focus between these two, what's the most biggest challenge in 2020 for KFC and the Pizza Hut?

Joey Wat -- Director and Chief Executive Officer

Let me share my thoughts. Lillian, thank you. The 2020 for more specific target guidance we'll give in Q4. But I think, as we can look at it right now, for KFC, obviously, the same-store sales because the Q1, Q2 this year was really very strong. It was phenomenal like 5% same-store sales, plus the new store opening. That is very, very tough to a lap. And then the chicken price, it will continue. The chicken price pressure, it will continue.

And then the third bit is the labor productivity, while we are very happy with the Q3 improvement, Q4 -- for next year, every year is a challenge, because of the government minimum wage challenge to the fundamental nature to our business and how are we going to continue to learn to use our new automated scheduling tool. So these are the sort of the top three challenges that we are paying a lot of attention to.

And last but not least, the new store openings. Obviously, while we targeting and pushing ourselves for same-store sales -- for positive same-store sales, we are actively aware that there is huge opportunity in China market, because we are only in 1,300 cities and there are still 700, 800 cities that we don't have a KFC and we still want to keep the pace. So to balance the multiple sort of focus for the business is always a tough game.

For Pizza Hut, the revitalization will continue, as I mentioned many times before. The focus is still on four fundamentals. And it does take two to three years time after turning around the same-store sales to cement all the changes that I mentioned along the four key pillars and others that I did not mention, because for a turnaround -- not, for a revitalization process, because Pizza Hut is still very profitable. It just require tweaking the key dimension of the business, but also everything else.

However, there still fundamental difference between the two business. What are the differences here? For our priority of making decisions. We are very clear. We want the traffic, first. We want the sales. And now, we want the profit. So, Pizza Hut, because of where it is, we certainly focus on the traffic and sales and we give a bit more flexibility to the profit, because that's where the business is.

However, for KFC, the requirement is higher, not only we want the traffic, we want the sell, but we also want the profit. So, this is something someone clever describe that sales is vanity, profit is sanity. It's a good business people. We want a bit of both and we certainly want a bit of both for KFC and we are probably OK for Pizza Hut. We have a bit more vanity than sanity for the time being.

So, thank you, Lillian. Andy?

Andy Yeung -- Chief Financial Officer

Yeah. So I'll add little bit. So, I think it's little bit too early to provide specific guidance for -- or outlook for 2020. But as Joey mentioned, I think the couple of focus that we're going to have, right, one is that, we're going to continue to drive sales through product innovations. So, again, because we are going to face some headwinds in the commodity prices.

And then the second part is that, we will also invest in a number of area, right, store remodeling. We will also invest in technology, a very important for us next year as well. We also continue to invest in our own delivery platform. And so, it will be likely an investment year for us in 2020 as well.

So I think -- overall, I think we want to see some tough comparisons, for example, because both Pizza Hut and KFC have very strong first half 2019, so it would be tough comparison. If you remember, like we achieved same-store sales growth of almost 5% in the first half for KFC, so that would be a pretty tough comparison. So, as Joey mentioned, we expect them to have both vanity and also sanity, so that will be a component for them to balance between continuing sales growth and also maintaining, protecting margins going forward.

So, thank you, Lillian.

Lillian Lou -- Morgan Stanley -- Analyst

Thanks a lot, Joey and Andy.

Operator

Thank you so much. And your last question comes from the line of Dylan Chu from CLSA. Dylan, your line is now open.

Dylan Chu -- CLSA -- Analyst

Thanks very much. Thanks for the opportunity. Actually, most of my questions have been cleared, so thanks for a lot of details. I guess, could I please maybe ask about your coffee strategy? Because I recall, Joey, you mentioned this is still a large potential area but you still need patience. So I'm just wondering if you could elaborate a bit on that. Sort of what kind of signs, which you need to see or what kind of metrics which you need to see before you want to invest in coffee a bit larger scale? And what kind of initiatives would you drive to do that?

Just slightly longer term, coffee is certainly a big potential category. But currently, it seems mostly food drives coffee. Coffee is sort of a supplement to our other food categories. In the future, do you think coffee has the potential to drive food, the other way around, at least in some of the dayparts? Just any color on that will be really helpful.

Joey Wat -- Director and Chief Executive Officer

Thank you, Dylan. We believe in the great potential of the coffee business, and we are committed to grow our coffee category. And there are two areas that we are focusing on right now. One is K-Coffee. Because KFC is a very, very resilient business model already, and we are introducing or growing the coffee as a product inside the business. So, as I mentioned, year-to-date, we sold 98 million cups already, and that's more than the total of 2018 full year, which is about 49%. Well, let's round it up, call it, 50% increase. So that's very, very impressive growth. And this number of coffee cups growth is comparable to some other pretty significant other coffee players in the market. However, given the base [Phonetic] of business, our coffee business, even with almost 100 million cups sold, it's only 3% of our business. And we are very happy with the growth, and the 3%, but it just gives you the sense of the scale of the overall KFC business and Yum China business there and thus, the challenge of growing.

The other bit of the coffee strategy is the C&J, the COFFii & JOY, which we are building and rolling out. And this is a new brand. When it comes to building a new brand, it takes time, right? Whatever successful brand that we're testing up in China like KFC, Pizza Hut and others, it does take time because not only it takes a great product that customers know already, but we have to build the store prototype, build the brand, build the supply chain, build the member base, build the talent pool and the complementary offering, such as food, in order to build the brand. And right now, we are also testing the scale and network effect as we increase density of our store in a given trade zone.

So where we are right now, we have opened 19 stores in Q3 -- by Q3, and we are targeting to get to 40, 45 stores by the end of the year. And next year, we'll commit -- we are committed to increase our investment. But the decision is always dynamic. It's a dynamic process, which is the same as Pizza Hut and KFC when it comes to new store openings. It's a dynamic process. It's a bottom-up process. But we are committed to grow the scale so that we can continue to learn all these building blocks of new coffee brand, including the scale and the network effect. So that's where we are in terms of the coffee strategy, Dylan.

Thank you very much.

Dylan Chu -- CLSA -- Analyst

Thank you very much.

Florence Lip -- Senior Director of Investor Relations

All right. Thank you. Thank you all for joining the call today, and we look forward to speaking with you on the next earnings call. That concludes today's call. Have a great day. Thank you.

Joey Wat -- Director and Chief Executive Officer

Thank you, Florence.

Andy Yeung -- Chief Financial Officer

Thank you.

Joey Wat -- Director and Chief Executive Officer

Thank you.

Operator

And that does conclude your conference for today. Thank you for participating. You may all now disconnect. Speakers, please stand by.

Duration: 66 minutes

Call participants:

Florence Lip -- Senior Director of Investor Relations

Joey Wat -- Director and Chief Executive Officer

Andy Yeung -- Chief Financial Officer

Michelle Cheng -- Goldman Sachs -- Analyst

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

Xiaopo Wei -- Citigroup -- Analyst

Anne Li -- Jefferies LLC -- Analyst

Lillian Lou -- Morgan Stanley -- Analyst

Dylan Chu -- CLSA -- Analyst

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