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Why Is Yum China (YUMC) Down 9.8% Since Last Earnings Report?

It has been about a month since the last earnings report for Yum China Holdings (YUMC). Shares have lost about 9.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Yum China due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Yum China Q1 Earnings and Revenues Beat Estimates

Yum China reported first-quarter 2023 results, with earnings and revenues beating the Zacks Consensus Estimate. Both top line and bottom lines increased on a year-over-year basis. YUMC benefited from robust same-store sales.

Earnings & Revenue Discussion

In first-quarter 2023, the company reported adjusted earnings of 69 cents per share, which beat the Zacks Consensus Estimate of 43 cents by 60.5%. The bottom line increased 188% from the 24 cents reported in the year-ago quarter.

Quarterly revenues of $2,917 million beat the consensus mark of $2,830 million by 3.1%. The top line rose 9% on a year-over-year basis. Excluding foreign currency translation, revenues increased 18% year over year.

Total system sales grew 17% year over year. System sales at KFC and Pizza Hut jumped 17% each (excluding foreign currency translation).

Same-store sales rose 8% year over year. This was primarily caused by decreases of 8% and 7% (excluding foreign currency translation) at KFC and Pizza Hut, respectively.

Operating Highlights

In first-quarter 2023, total costs and expenses amounted to $2,501 million, up 1% from the $2,477 million reported in the prior-year quarter.

The restaurant margin was 20.3% compared with 13.8% in the prior-year quarter. Growth primarily resulted from sales leveraging, cost structure rebasing, and temporary reprieve from the government and landlords.

In the quarter, the adjusted operating profit totaled $419 million compared with $193 million in the prior-year quarter. Adjusted net income amounted to $292 million compared with $102 million in the prior-year quarter.

Balance Sheet

As of Mar 31, cash and cash equivalents were $1,111 million compared with $1,130 million as of Dec 31, 2022. Inventories were $378 million compared with $417 million in the previous quarter.

In the first quarter, YUMC repurchased nearly 1 million shares at an average price of $60.3 per share. As of Mar 31, the company had $1.1 billion available for the buyback program.

Management declared a quarterly cash dividend of 13 cents per common share. The dividend will be payable on Jun 20 to shareholders of record as of May 30.

Unit Development and Other Updates

In first-quarter 2023, Yum China opened 233 net new stores due to the development of the KFC and Pizza Hut brands. As of Mar 31, total restaurant count reached 13,180.

In the quarter under review, Yum China’s delivery contributed nearly 36% of KFC and Pizza Hut's company sales.

Digital orders contributed 89% to KFC and Pizza Hut's company sales compared with 90% in the previous-year quarter. Loyalty programs of KFC and Pizza Hut led to year-over-year growth by increasing to more than 430 million members.

2023 Outlook

Yum China reaffirmed its 2023 view. Management expects opening 1,100-1,300 stores. It anticipates solid expansion related to KFC and Pizza Hut stores, along with growth of same-store sales. Capital expenditure in 2023 is anticipated to be $700-$900 million.

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How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

The consensus estimate has shifted 6.9% due to these changes.

VGM Scores

At this time, Yum China has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Yum China has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

Performance of an Industry Player

Yum China belongs to the Zacks Retail - Restaurants industry. Another stock from the same industry, Chipotle Mexican Grill (CMG), has gained 0.9% over the past month. More than a month has passed since the company reported results for the quarter ended March 2023.

Chipotle reported revenues of $2.37 billion in the last reported quarter, representing a year-over-year change of +17.2%. EPS of $10.50 for the same period compares with $5.70 a year ago.

For the current quarter, Chipotle is expected to post earnings of $12.11 per share, indicating a change of +30.2% from the year-ago quarter. The Zacks Consensus Estimate has changed +0.7% over the last 30 days.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #1 (Strong Buy) for Chipotle. Also, the stock has a VGM Score of D.

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