Yum China: Reports First Quarter 2018 Results

Shanghai / CN. (yb) Yum China Holdings (Yum! Brands Inc.) reported unaudited results for the first quarter ended March 31, 2018. Reported GAAP results include Special Items, which are excluded from adjusted measures. Special Items are not allocated to any segment and therefore only impact reported GAAP results of Yum China.

First Quarter Highlights

  • Total revenues increased 15 percent year over year to USD 2.2 billion from USD 1.9 billion (6 percent year over year increase excluding foreign currency translation (F/X)).
  • Total system sales grew 6 percent year over year, with 9 percent growth at KFC partially offset by 1 percent decline at Pizza Hut, excluding F/X.
  • Same-store sales grew 3 percent year over year, with an increase of 5 percent at KFC partially offset by a 5 percent decrease at Pizza Hut, excluding F/X.
  • Restaurant margin was 17.9 percent, as compared with 20.4 percent in the prior year period.
  • Operating Profit increased 33 percent year over year to USD 395 million from USD 296 million (22 percent year over year increase excluding F/X). Excluding Special Items, Adjusted Operating Profit was USD 297 million for the first quarter of 2018, as compared with USD 296 million in the prior year period (8 percent year over year decrease excluding F/X).
  • Net Income increased 41 percent to USD 288 million from USD 204 million in the prior year period.
  • Effective tax rate was 26.6 percent.
  • Diluted EPS was USD 0.72, as compared with USD 0.52 in the prior year period. Excluding Special Items, Adjusted Diluted EPS was USD 0.53.
  • Completed the acquisition of an additional 36 percent equity interest in an unconsolidated affiliate that operates KFC stores in Wuxi, China (Wuxi KFC), for cash consideration of approximately USD 98 million, bringing Yum China’sequity interest in Wuxi KFC to 83 percent. A gain of USD 98 million was recorded from the re-measurement of our previously held equity interest.
  • Opened 203 new restaurants during the quarter, bringing total store count to 8,112 across more than 1,200 cities.
  • Online delivery contributed 16 percent to Company sales, up from 13 percent in the prior year period. Delivery services now available in 970 cities, up from 700 cities in the prior year period.
  • As of March 31, 2018, the KFC loyalty program had more than 120 million members and the Pizza Hut loyalty program had over 40 million members.
  • Mobile payment accounted for approximately 56 percent of Company sales in the first quarter of 2018, as compared to 31 percent in the prior year period.

CEO and CFO Comments

«We are pleased to start 2018 with positive system sales and same-store sales growth for the Company. The strong operational and financial performance of KFC is particularly encouraging as it successfully lapped two strong first quarters in 2017 and 2016. During the quarter, while Pizza Hut had some challenges with same-store sales growth and restaurant margin, we remain committed to our revitalization plan and key focus areas to drive sales growth. We believe our focus on food innovation and customer experience, together with the execution of strategic priorities in digital and delivery, has enabled us, and will continue to enable us, to build a stronger Yum China», said Joey Wat, CEO of Yum China.

«As part of our capital allocation strategy to invest in and grow our core brands, we acquired an additional 36 percent interest in Wuxi KFC, increasing our total equity interest to 83 percent. In 2018, we now expect our annual new build to reach 600-650 units, increasing from the previously announced 550-600 units. We will continue to invest in digital and delivery, which we believe will drive long-term growth», remarked Jacky Lo, CFO of Yum China.

Dividend and Share Repurchase

  • The Board of Directors declared a cash dividend of USD 0.10 per share on Yum China’s common stock, payable as of the close of business on June 20, 2018 to stockholders of record as of the close of business on May 30, 2018.
  • Yum China did not repurchase any shares during the first quarter of 2018.

New-Unit Development and Asset Upgrade

  • We opened 203 new restaurants and remodeled 125 restaurants in the first quarter of 2018.
New Units Restaurant Count
First As of March 31
Quarter 2018 2017
Yum China 203 8,112 7,653
KFC 144 5,602 5,277
Pizza Hut 41 2,214 2,105
Little Sheep, East Dawning, Taco Bell 18 296 271

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Restaurant Margin

  • In the first quarter of 2018, Yum China restaurant margin was 17.9 percent, as compared with 20.4 percent in the prior year period, primarily attributable to the investment in product upgrades and promotions at Pizza Hut and its sales deleveraging.
Q1-2018 Q1-2017 percent ppts change
Yum China 17.9 percent 20.4 percent (2.5)
KFC 20.9 percent 20.8 percent +0.1
Pizza Hut 10.5 percent 19.7 percent (9.2)

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Digital and Delivery

  • Over 120 million loyalty program members for KFC and over 40 million for Pizza Hut, an increase of 50 million and 20 million year over year, respectively.
  • Mobile payments accounted for approximately 56 percent of Company sales in the quarter, an increase of 25 percentage points year over year.
  • Delivery contributed to 16 percent of Company sales in the first quarter of 2018, an increase of 3 percentage points year over year.
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