Yum China’s Operating Profit Surges on New Restaurant Openings

Total system sales grew 4% including KFC and Pizza Hut during Q4 FY16

Yum China Holdings Inc. (NYSE: YUMC) announced its Q4 FY16 and full-year FY16 financial results on February 08th, 2017.

The Shanghai-based company has exclusive rights in Mainland China to KFC, Pizza Hut, and Taco Bell, which opened its first restaurant in China in January 2017. Yum China also owns the Little Sheep and East Dawning concepts. Yum China had more than 7,500 restaurants and more than 420,000 employees in over 1,100 cities at the end of 2016. Read more about Yum China’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Yum China’s total system sales grew 4%, including growth of 4% at KFC and 6% at Pizza Hut Casual Dining, excluding foreign currency translation. Foreign currency translation negatively impacted operating profit by $5 million during the reporting quarter. The company opened 302 new restaurants during the quarter and 575 new restaurants for the full-year FY16, driven by development of the KFC brand. About 96 of the new restaurants were opened in 56 new cities. Yum China remodeled a total of 791 restaurants, focusing on KFC. Over 75% of Yum China’s current store portfolio has been remodeled or built over the past five years. Yum China also opened its first Taco Bell restaurant in Shanghai, China. Same-store sales were flat, with an increase of 1% at KFC, offset by a decline of 3% at Pizza Hut Casual Dining.

For the quarter, Yum China’s restaurant margin increased 3.0% to 11%, primarily aided by the impact of retail tax structure reform, partially offset by wage inflation companywide and commodity inflation at KFC. Reported operating profit surged 922% to $58 million from $5 million in the year-ago same period. Diluted EPS grew to $0.23 from $(0.08) in Q4 FY15.

FY16 financial highlights

During the full-year FY16, Yum China’s total system sales grew 5%, including growth of 6% at KFC and 3% at Pizza Hut Casual Dining, excluding foreign currency translation. Yum China opened 575 new restaurants for the full year, or 5% net growth, surpassing 7,500 restaurants in China.         Same-store sales were flat, with an increase of 3% at KFC, offset by a decline of 7% at Pizza Hut Casual Dining. Total restaurant margin increased 2.7 percentage points to 15.3%, primarily aided by the impact of retail tax structure reform implemented on May 01st, 2016.

For FY16, Yum China’s restaurant margin increased 2.7% to 15.3%, primarily aided by the impact of retail tax structure reform. This is reflected primarily in lower food and paper cost. Wage inflation of 8% partially offset these effects. During the year, reported operating profit grew 31% to $640 million, primarily aided by the impact of retail tax structure reform. Foreign currency translation negatively impacted operating profit by $36 million. Excluding foreign currency and special items, operating profit grew 37%. As a result, FY16 diluted EPS jumped 53% to $1.36 from $0.89 in the prior year.

During FY16, Yum China made rapid progress in Digital and Delivery. Its loyalty programs have over 80 million members between KFC and Pizza Hut and are ranked #1 in the restaurant industry worldwide in terms of number of members. Members in the loyalty programs increased to over 60 million for KFC and over 20 million for Pizza Hut Casual Dining at year end. Total delivery sales reached approximately $700 million. Also in 2016, Yum China was the #1 among restaurant operators in terms of online sales in China.

Cashless payment accounted for about 30% of Yum China’s company sales. Mobile payments reached about 17% of company sales in 2016, with over $2 billion in company sales paid using cashless payment methods. Delivery represented about 10% of company sales for 2016.

Other highlights

Diluted share count: Pursuant to the strategic investment agreement between Yum China, Primavera Capital Group, and Zhejiang Ant Small and Micro Financial Services Group Co., Ltd, Yum China issued approximately 19 million shares of common stock to Primavera and Ant Financial on November 01st, 2016. The reported full year 2016 diluted share count of 369 million is based on the weighted average number of days for the period that the shares or dilutive equity awards were outstanding, and includes only two months of impact from the shares issued to the two strategic investors on November 01st, 2016 and public company stock compensation programs. On a pro-forma basis, assuming all shares and dilutive equity awards were issued and outstanding on January 01st, 2016, the total diluted share count would be 395 million. This would have reduced diluted EPS to $1.27 from $1.36.

Share repurchase: The Board of Directors authorized Yum China to repurchase up to $300 million of shares of common stock. These shares may be repurchased from time to time in the open market, through privately negotiated transactions or other programs, subject to market conditions and other factors.

New restaurants: Yum China opened 302 new restaurants during the quarter and 575 new restaurants for the full-year FY16, driven by development of the KFC brand.

Yum China to triple restaurant count: Yum China plans to triple the number of restaurants and have 12 KFC restaurants per million people in China. Yum now has more than 7,300 KFC and Pizza Hut outlets. Yum China is targeting a 15% earnings expansion, and open restaurants in mega cities, major transportation hubs, and new shopping malls. Currently, China has about 4 KFC stores per million people versus 13 stores per million people in the US.

New appointments: On February 07th, 2017, Yum China announced the appointment of Joey Wat as President and COO of Yum China, reporting to the CEO Micky Pant. The company also appointed Johnson Huang as General Manager of the Company’s KFC business, reporting to Joey Wat. Wat previously served as CEO of the Company’s KFC business; in addition to overseeing the KFC brand, she will also oversee the Company’s Pizza Hut Casual Dining and Pizza Hut Home Service brands. Huang previously served as Chief Information and Marketing Support Officer. In his new role, Huang will be the new leader for the KFC brand.

Launch of Taco Bell: On January 09th, 2017, Yum China opened the first Taco Bell restaurant near Shanghai’s landmark Oriental Pearl Tower in the Lujiazui area, the city’s central business district. This is Taco Bell’s latest international market entry as it grows the brand globally. The menu features the brand’s favorites that have been adapted to local tastes. High quality ingredients coupled with newly developed sauces create items such as the Shrimp and Avocado Burrito unique to Taco Bell restaurants in China. The Crunchy Taco Supreme is now loaded with Taco Bell’s signature Nacho Cheese Sauce and the Volcano Chicken Burrito features spicy Sriracha sauce.

Currently, Taco Bell has more than 7,000 restaurants in the world with over 300 in 26 countries outside the US. Taco Bell’s first restaurant in China is part of the brand’s global growth strategy of reaching 1,000 restaurants internationally by 2022.

Stock Performance

Yum China’s stock stood at $26.77, flat at the end of yesterday’s session compared to its previous closing price. The Company’s shares vacillated between an intraday high of $27.09 and a low of $26.57 during Thursday’s session. The stock’s trading volume was at 2,698,426 for the day. The Company’s market cap was at $10.37 billion as of Thursday’s close.

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