KFC Helps Yum China Get Back to Growth Mode


Key Points

  • Yum China surpassed 10,000 total locations in Q3 2020 and is the largest restaurant operator in Mainland China based on 2019 revenue.
  • KFC and Pizza Hut stores are nearly back to pre-COVID-19 sales levels, and the company overall reported 1% year-over-year sales growth last quarter.
  • Yum China has one of the largest digital audiences in the world among restaurants with over 285 million KFC and Pizza Hut rewards members in China as of September.

Our experts issued a rare “Double Down” Buy alert on this one stock… Learn more.


The global restaurant industry has been deeply impacted by the coronavirus pandemic, but Yum China Holdings (NYSE:YUMC) is more than holding its own. With sole licensing rights to the ever-popular KFC, Pizza Hut, and Taco Bell chains from former parent Yum! Brands (NYSE:YUM) in mainland China and the acquisition of local hot pot chain Huang Ji Huang early in the year, China’s largest restaurant operator appears to be back in growth mode. Challenges remain, but this is still one of my favorite restaurant stocks.

Breaded and fried chicken strips.

Image source: Getty Images.

Improving traffic for fried chicken

2020 has been an unexpected detour for Yum China as it builds toward its long-term goal of 20,000 restaurants. But thanks to the aforementioned acquisition and the opening of 312 new locations in the third quarter of 2020 (nearly three-quarters of them KFC), the company passed the 10,000 restaurant milestone in the last quarter. However, comparable store sales (or comps, an average of traffic and average guest ticket size at existing stores) are still negative compared to a year ago.  

Period

KFC Comps YOY

Pizza Hut Comps YOY

Q1 2020

(11%)

(31%)

Q2 2020

(10%)

(12%)

Q3 2020

(6%)

(7%)

Data source: Yum China. YOY = year over year.

It wasn’t all bad, though. All told, revenue increased 1% in Q3 to $2.35 billion due to new locations in operation. Net income surged 96% from a year ago to $439 million, mostly from investment gains from Yum China’s interest in food delivery outfit Meituan-Dianping (OTC:MPNGF). Adjusting for one-time items and equity gains, net income was still up a respectable 10% to $234 million.

Nevertheless, while dine-in traffic is still down, digital and delivery options remain popular and are helping comps home in on year-over-year breakeven. Digital orders and delivery equated to an impressive 78% of the total for KFC and Pizza Hut in Q3. And the loyalty program member base was a massive 285 million, up from 230 million a year ago — making this one of the largest digital restaurant ecosystems on the planet and in tip-top shape to benefit from the new digital era emerging as a result of the pandemic.  

A cash infusion for the war chest

Also of note in Q3 was Yum China’s secondary stock offering on the Hong Kong Stock Exchange. The result was a fresh $2.2 billion in net cash proceeds, bolstering Yum China’s total cash and short-term investment balance at the end of September to $4.2 billion. The company also has no debt.  

This is a significant sum as the company’s total market cap is just $22 billion as of this writing. And shares trade for just 33 times trailing-12-month free cash flow (or 29 times 12-month free cash flow when backing out the cash war chest from the market cap) — a reasonable sum given the bottom line has taken a serious hit this year due to operational disruptions.  

With plenty of liquidity to continue growing the popular KFC brand, as well as its wholly owned chains like Huang Ji Huang and COFFii & JOY, Yum China is in good shape and back on a path to growth. This remains one of my favorite stocks in the restaurant investment universe.

Leave a Reply

Your email address will not be published. Required fields are marked *