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Yum China Ends 2018 on a High Note

By Nicholas Rossolillo – Updated Apr 20, 2019 at 11:42PM

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KFC and Pizza Hut delivered good numbers as the company grows.

Shares of Yum China (YUMC -0.84%) -- the exclusive Chinese licensee of KFC, Pizza Hut, and Taco Bell that was spun off from Yum! Brands (NYSE: YUM) a few years ago -- rallied after the company recently reported a better-than-feared report for the fourth quarter of 2018. Investors have been fretting that a slowdown in the world's second-biggest economy would hurt restaurant operators, and it's true that Yum China has slowed down as of late. Growth is growth, though, and the fast-food chain was able to deliver solid bottom-line numbers.

2018 in review

Though total sales increased less in the fourth quarter than in quarters past (up just 3% year over year in the fourth quarter), Yum China kept expenses in check to deliver an operating profit 77% higher than a year ago. While restaurant margin (average profit per location) at Pizza Hut continued to deteriorate to 4.9% from 6.4% a year ago, KFC's restaurant margin improved to 14.3% compared to 13.9% last year. Paired with a bunch of new location openings, it all added up to big bottom-line gains for Yum China in 2018.

Metric

Full Year 2018

Full Year 2017

% Change (YOY)

Revenue

$8.42 billion

$7.77 billion

8%

Operating expenses

$7.47 billion

$6.99 billion

7%

Earnings per share

$1.79

$1.00

79%

KFC restaurant margin

17.9%

18%

(0.1 p.p.)

Pizza Hut restaurant margin

10.3%

13.9%

(3.6 p.p.)

YOY = year over year. P.p. = percentage point. Data source: Yum China.

Capping off the fourth quarter was the repurchase of 4.4 million shares of Yum China common stock for $145.3 million, averaging to a price of $32.85 per share. That's well under the $39-and-change share price as of this writing, so it appears to be money well spent -- at least in the short term. Given the company's ambitious plans for growth, and if sales numbers continue to rebound off of the third-quarter lull reported last fall, Yum China's stock could have plenty of upside left in the tank. 

A growing Chinese consumer base

Yum China's management reiterated on the fourth-quarter report that it plans to expand to 20,000 locations in China. At year's end, there were 8,484 restaurants, made up mostly of KFC and Pizza Hut and a small but fast-growing number of the company's own Little Sheep hot pot concept. That's a lot of new locations planned, and the multibrand chain is already established in over 1,200 cities in China. Nevertheless, reaching that lofty goal might not take as long as some may think.

Someone holding a smartphone pressing an order button on the screen

Image source: Getty Images.

Check out the latest Yum China earnings call transcript.

Over the course of 2018, Yum China opened 819 stores. Another 600 to 650 should open in 2019. That's a sharp slowdown in new development, but KFC is facing tough competition from peers ramping up their deals to woo consumers. KFC's same-store sales (which measure foot traffic and average ticket size) are a testament to that. Comps grew 3% in the fourth quarter, a slowdown from 7% during the same period the year prior. Pizza Hut's same-store contraction slowed to just a 4% decline in the fourth quarter, less than the 5% average for the whole year.

Thus, easing up on new development in 2019 is prudent. That's because Yum has other levers to pull to foster growth. Menu enhancements, especially at Pizza Hut, are ongoing. Remodeling older stores is in full swing, too, and digital ordering and increased delivery options are key areas of focus to cater to the busy Chinese diner. Digital and delivery initiatives have helped keep costs in check all year, one of the big reasons the bottom line was able to edge up in spite of the recent slowdown in the overall Chinese economy.

Given the current situation, management still thinks it can grow overall sales in high single digits and operating profits by double digits. It should continue to be a bumpy ride, but China is still a developing market and a huge sandbox for Yum to play in.

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.

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