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5 Things Yum China Inc. Management Wants You to Know

By Steve Symington - Oct 14, 2017 at 6:48PM

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Read on for invaluable insight from the Chinese fast food giant's latest quarterly call.

Yum China Inc. (YUMC 0.55%) announced mixed fiscal third-quarter results early last week, as earnings per diluted share remained flat on a year-over-year basis at $0.53, missing estimates by $0.04 per share. But with the help of new capital-return initiatives and stronger-than-expected same-store sales, investors were more than pleased with what the parent company of KFC and Pizza Hut in China had to say. Shares climbed more than 5% last Monday as investors digested the news.

But it pays to dive deeper in an effort to understand what truly drove Yum China's business. To that end, management spends time with analysts during a subsequent conference call each quarter to elaborate on the business performance. Here are five important points that Yum China management discussed during this quarter's call. 

Yum Brands KFC signs in China


1. Three main sources of strength

We delivered a strong performance in the third quarter, and there are three statistics of particular significance. The first was 7% same-store-sales growth for KFC; the second, that our loyalty membership program increased to over 120 million members from the 100 million last quarter; and lastly, we collected over $1.2 billion of our sales through non-cash in the last quarter alone.
-- Yum China CEO Micky Pant

For perspective on KFC's relative strength this quarter, that 7% same-store-sales growth singlehandedly offset a flat comps performance at Pizza Hut. As such, Yum China's overall same-store sales climbed 6%, arriving well ahead of the 2.9% Wall Street was modeling.

Meanwhile, it's no mystery that a well-implemented loyalty program serves to drive meaningful incremental and repeat traffic. But the scale and growth of Yum China's 120 million-strong membership base is simply staggering.

Finally, on the third point, Pant elaborated that Yum China collects around 45% of its total revenue from mobile payments, and that its status as a leader in cashless payments in China is only serving to further accelerate growth.

2. On innovative delivery options

We are driving the delivery business through network expansion, digital innovation, and marketing campaigns. In July, we expanded our delivery business through select stations of China's high-speed rail network, the largest in the world. Customers can preorder our food before their journey and get KFC food delivered to their seats. While high-speed rail delivery has just started, we are concerned about its growth potential in the future as well. [...] We believe our digital and delivery capabilities provide a strong foundation for future growth.
-- Yum China COO Joey Wat

Of course, in this case Wat is using the word "concerned" in a positive light; By expanding its delivery options to on-the-go consumers, Yum China is aiming to make its wildly popular food even more accessible to the masses. It's obvious those consumers are embracing its efforts, considering delivery already represented around 11% of total company sales during the quarter. But that also leaves plenty of room for growth in the coming quarters.

3. A new dividend, boosted share repurchases

We are confident in our ability to generate free cash flow, so we are initiating a quarterly dividend at $0.10 per share, with room for higher payout in the future is subject to Yum China's capital needs. In addition, our board has approved a further $250 million for share repurchase.
-- Yum China CFO Jacky Lo

At today's prices, Yum China's new quarterly dividend equates to a modest 0.93% annual yield. But that's a great place to start for shareholders willing to reinvest those dividends and watch Yum China's payout continue to grow. Moreover, the incremental $250 million share-repurchase authorization brings Yum China's total repurchase plan to $550 million, of which the company has already repurchased around 3.4 shares for $128 million.

4. On "revitalizing" Pizza Hut

Pizza Hut same-store sales were flat in Q3, with a 3% transaction increase and a negative 3% in ticket average, mainly driven by an increase in delivery business. While the positive transaction growth at Pizza Hut is encouraging, there's still a lot of work ahead of us.
-- Joey Wat

Yum China is forthright regarding Pizza's Hut's current struggles. But as Wat alluded to, it's also working hard to address those problems through a combination of menu innovation, new digital capabilities, "significant investments in raw materials and ingredients to improve product quality and taste," consolidation of its delivery network to increase speed and efficiency, and tests of multiple new store formats in an effort to target different customer segments. Investors should watch closely, then, for progress on these initiatives in the quarters ahead.

5. On Yum China's new CEO

I'm very pleased that we and the Board of Directors of Yum China have agreed that Joey Wat will be the next CEO of Yum China, effective March 1, 2018. You've all witnessed Joey's leadership skills and successful track record, and I'm thrilled to hand over the reins to such a great leader in a few months' time.
-- Micky Pant

Yum China didn't elaborate on why Pant is stepping and being replaced by Wat. But Yum China board chairman Fred Hu was quick to point out that Pant will remain with the company as vice chairman of the board and a senior advisor. And Wat, for her part, boasts an impressive track record since joining the company as president of KFC China in late 2014. She was promoted to CEO of KFC China the following August.

Apart from Yum China's slight bottom-line miss relative to expectations, there was little not to like from an investor's perspective this quarter. Yum China's core KFC concept continues to outperform, the foundation is set for the turnaround of Pizza Hut to progress, and the overall company is well positioned to extend its commanding lead as the country's largest purveyor of fast food. If Yum China is able to sustain this momentum in the coming quarters, I suspect its recent gains should only be the start of a much longer upward trend. 

Steve Symington has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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