Please ensure Javascript is enabled for purposes of website accessibility

KFC Is Yum China’s Mule, and Will Be for Quite Some Time

By Nicholas Rossolillo – Nov 2, 2018 at 7:46PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

China just really likes fried chicken.

Shares of China's largest restaurant chain Yum China (YUMC 3.74%) rebounded in a big way after third-quarter 2018 earnings. The reason? KFC.

Yum China hasn't been perfect since gaining independence from former parent Yum Brands a couple of years ago. With woes at Pizza Hut combining with a slowdown in Chinese consumer spending, the company's shares have been bogged down this year and are sporting a 10% decline as of this writing. Worries aside, though, fried chicken alone is popular enough that it could float Yum China's stock for years to come. 

The favorite food on the other side of the globe

Pizza Hut continues to drag down KFC, but the fried chicken chain's strength continues to pull results higher. During the third quarter, 6% growth at KFC offset a 2% decline at the pizza segment, good for 4% total revenue and 16% earnings-per-share growth compared with a year ago.

That builds on modest revenue gains to date in 2018, which have translated into strong double-digit increases in the bottom line.

Metric

Nine Months Ended Sept. 30, 2018

Nine Months Ended Sept. 30, 2017

YOY Increase (Decrease)

Revenue

$6.50 billion

$5.90 billion

10.2%

Operating expenses

$5.64 billion

$5.17 billion

9.1%

Earnings per share

$1.59

$1.27

25.2%

KFC restaurant margin

19%

19.3%

(0.3 p.p.)

Pizza Hut restaurant margin

11.8%

16.3%

(4.5 p.p.)

YOY = year over year. P.P. = percentage points. Data source: Yum China quarterly earnings.

Though Yum China rejected a buyout offer over the summer from private Chinese investor Hillhouse Capital that sent share prices down, management has doubled down on its bullish outlook. It repurchased 2.7 million shares during the third quarter for $93.7 million, and another 3.4 million shares were bought in October alone (which falls in the fourth quarter) for $110 million.

The total buyback program was recently increased to allow for another $1 billion to be purchased. That's an aggressive move, especially considering Yum China's entire market cap is just $13.6 billion. Even though business isn't exactly firing on all cylinders, Yum China's top team has plenty of reason to be so optimistic.

A closeup picture of fried chicken.

Image source: Getty Images.

Chicken is enough runway for now

It's great news that KFC continues to perform so well. The chain is king of the restaurant hill in China and by far Yum China's most valuable asset. Of the 8,313 locations Yum China had at quarter end, 5,800 of them are KFC. Because the Chinese consumer continues to overwhelmingly support the fried chicken brand in spite of an overall slowdown in spending in China, new locations are being opened at an aggressive pace.

Metric

2018 YTD Increase (Decrease)

Total Store Count

KFC existing-store comparable sales

2%

N/A

New KFC openings

411

5,800

Pizza Hut existing-store comparable sales

(5%)

N/A

New Pizza Hut openings

106

2,215

YTD = year to date. Data source: Yum China quarterly earnings.

New KFCs are popping up at an 8% rate this year to Pizza Hut's 5%. That's because Pizza Hut is still sorting through its problems as it tries to connect with the younger Chinese demographic. Fried chicken, on the other hand, is still hip. Existing stores keep yielding higher results, and new openings are being well received. To build on that momentum, Yum China has been expanding its menu to promote other meal times at KFC -- like breakfast, dessert, and midday coffee and tea.

Yum China sees having 20,000 stores in China over time. With only 8,313 as of quarter end, that may seem like a far-off goal. But at the current average rate of new openings -- 7% because of the aggressive new KFC builds -- the company will reach that target in about 13 years.

That should equate to big gains in sales. However, given Yum China's track record so far in coaxing even more profit out of KFC, this restaurant stock looks like a great long-term play on China's still-developing middle class.

Nicholas Rossolillo and his clients own shares of Yum China Holdings, Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Yum China Holdings, Inc. Stock Quote
Yum China Holdings, Inc.
YUMC
$48.00 (3.74%) $1.73

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.