A month has gone by since the last earnings report for Yum China Holdings (YUMC). Shares have added about 3.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Yum China due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Yum China reported fourth-quarter 2023 results, with earnings and revenues beating the Zacks Consensus Estimate. The top and the bottom line increased on a year-over-year basis.
YUMC achieved record-breaking revenues and profits and returned substantial value to shareholders through cash dividends and share repurchases. During the year, the company returned $833 million to shareholders, up 25% year over year.
The company leverages its distinct strengths, which include brands deeply ingrained in China, remarkable agility and robust operational execution. These factors position YUMC favorably to achieve growth targets for 2024-2026. With a focus on enhancing shareholders’ value, the company aims to increase cash dividends and ramp up share buybacks. It expects to return a minimum of $3 billion to shareholders through 2024-26.
YUMC is optimistic about expanding its footprint in China by 2026. It emphasizes on strategic store openings in lower-tier cities to tap into long-term consumption trends. It also intends to introduce innovative products and marketing campaigns to drive sales across different city tiers.
In fourth-quarter 2023, the company reported adjusted earnings per share of 25 cents, beating the Zacks Consensus Estimate of 13 cents. The bottom line surged 92.3% from 13 cents reported a year ago.
Quarterly revenues of $2.5 billion outpaced the consensus mark of $2.4 billion. The top line rose 19.4% on a year-over-year basis. Excluding foreign currency translation, revenues increased 21% year over year. The upside can be attributed to net new unit contribution (12%) and same-store sales growth (4%).
Total system sales increased 21% year over year. System sales at KFC and Pizza Hut increased 20% and 24% (excluding foreign currency translation), respectively.
Same-store sales moved up 4% year over year. The upside was primarily driven by 3% and 6% growth (excluding foreign currency translation) at KFC and Pizza Hut, respectively. Our model predicted the metric to improve 4.1% year over year.
In fourth-quarter 2023, total costs and expenses amounted to $2.4 billion compared with $2 billion reported in the prior-year quarter. Our model suggested the metric at $2.3 billion. The restaurant margin was 10.7% compared with 10.4% a year ago. The upside was mainly backed by sales leveraging, lower rider costs, favorable commodity prices and lower advertising expenses. During the quarter, adjusted operating profit totaled $116 million compared with $40 million a year ago. Adjusted net income amounted to $103 million compared with $52 million in the prior-year quarter.
As of Dec 31, cash and cash equivalents were $1.12 billion compared with $1.13 billion as of Dec 31, 2022. Inventories were $424 million compared with $417 million as of Dec 31, 2022.
In the fourth quarter, YUMC repurchased nearly 7.5 million shares for $336 million. As of Dec 31, the company had $1.5 billion available for the buyback program.
The company declared a 23% dividend hike to 16 cents per share, payable on Mar 26, 2024, to shareholders of record as of Mar 5, 2024.
In fourth-quarter 2023, Yum China opened 542 net new stores. As of Dec 31, the total restaurant count reached 14,644.
In the quarter under review, Yum China’s delivery contributed 38% to KFC and 40% to Pizza Hut's company sales. In 2023, digital sales came in at $9.2 billion. Digital ordering contributed approximately 89% of total company sales.
Total revenues in 2023 amounted to approximately $11 billion compared with $9.6 billion in 2022. Adjusted Net Income in 2023 totaled $842 million compared with $446 million reported in 2022. In 2023, adjusted EPS came in at $2 per share compared with $1.05 reported in the previous year.
Management expects to open 1,500-1,700 new stores in 2024. Capital expenditures in 2024 are projected to be between $700-$850 million.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
VGM Scores
At this time, Yum China has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Yum China has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
Performance of an Industry Player
Yum China is part of the Zacks Retail - Restaurants industry. Over the past month, Brinker International (EAT), a stock from the same industry, has gained 10.4%. The company reported its results for the quarter ended December 2023 more than a month ago.
Brinker International reported revenues of $1.07 billion in the last reported quarter, representing a year-over-year change of +5.4%. EPS of $0.99 for the same period compares with $0.76 a year ago.
Brinker International is expected to post earnings of $1.13 per share for the current quarter, representing a year-over-year change of -8.1%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.3%.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #2 (Buy) for Brinker International. Also, the stock has a VGM Score of B.
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