Shanghai / CN. (yb) Yum China Holdings Inc. reported unaudited results for the fourth quarter and year ended December 31, 2019. 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.
Fourth Quarter Highlights
- Total revenues increased 6 percent year over year to USD 2.03 billion from USD 1.91 billion (8 percent increase excluding foreign currency translation (F/X)).
- Total system sales grew 8 percent year over year, with growth of 10 percent at KFC and 1 percent at Pizza Hut, excluding F/X.
- Same-store sales grew 2 percent year over year, with a 3 percent increase at KFC and flat same-store sales at Pizza Hut, excluding F/X.
- Restaurant margin was 12.4 percent, compared with 11.5 percent in the prior year period.
- Operating Profit increased 14 percent year over year to USD 94 million from USD 84 million (16 percent increase excluding F/X).
- Reported an impairment charge of USD 11 million on intangible assets and goodwill attributable to DAOJIA.com.cn (Daojia), compared with USD 12 million in the prior year period. Excluding this Special Item in 2018 and 2019, Adjusted Operating Profit increased 12 percent year over year (14 percent increase excluding F/X).
- Effective tax rate was 26.8 percent.
- Net Income increased 22 percent to USD 90 million from USD 74 million in the prior year period, primarily due to the increase in operating profit and mark to market gain from our equity investment in Meituan Dianping, partially offset by the lapping of a tax benefit adjusting the provisional amount of transition tax related to US tax reform in the fourth quarter of 2018. Adjusted Net Income increased to USD 98 million from USD 46 million in the prior year period. (2 percent year over year increase excluding the mark to market gain of USD 24 million in the fourth quarter of 2019 and mark to market loss of USD 27 million in the fourth quarter of 2018 from our equity investment in Meituan Dianping, 4 percent increase excluding F/X).
- Diluted EPS increased 21 percent to USD 0.23 from USD 0.19 in the prior year period. Adjusted Diluted EPS increased to USD 0.25 from USD 0.12 in the prior year period (flat year over year excluding the mark to market gain or loss from our equity investment in Meituan Dianping in 2019 and 2018, respectively, 5 percent increase excluding F/X).
Full Year Highlights
- Total revenues increased 4 percent year over year to USD 8.78 billion from USD 8.42 billion (9 percent increase excluding F/X).
- Total system sales grew 9 percent year over year, with growth of 11 percent at KFC and 3 percent at Pizza Hut, excluding F/X.
- Same-store sales increased 3 percent year over year, with a 4 percent increase at KFC and a 1 percent increase at Pizza Hut, excluding F/X.
- Restaurant margin was 16.0 percent, compared with 15.7 percent in the prior year.
- Operating Profit decreased 4 percent year over year to USD 901 million from USD 941 million, primarily due to lapping the Wuxi re-measurement gain of USD 98 million in the first quarter 2018. Excluding the Wuxi re-measurement gain and other Special Items, Adjusted Operating Profit increased 7 percent year over year to USD 912 million from USD 855 million (12 percent increase excluding F/X).
- Effective tax rate was 25.9 percent.
- Net Income increased 1 percent to USD 713 million from USD 708 million in the prior year. Adjusted Net Income increased 20 percent to USD 729 million from USD 606 million in the prior year (5 percent year over year increase excluding the mark to market gain of USD 63 million in 2019 and mark to market loss of USD 27 million in 2018 from our equity investment in Meituan Dianping, 11 percent increase excluding F/X).
- Diluted EPS increased 3 percent to USD 1.84 from USD 1.79 in the prior year. Adjusted Diluted EPS increased 23 percent to USD 1.88 from USD 1.53 in the prior year (7 percent year over year increase excluding the mark to market gain or loss from our equity investment in Meituan Dianping in 2019 and 2018, respectively, 13 percent increase excluding F/X).
- Opened 1,006 new stores during the year, bringing total store count to 9,200 across more than 1,300 cities.
Key Financial Results
| Fourth Quarter 2019 | Full Year 2019 | ||||||||||||||||||||||||||||||||
| Percent Change | Percent Change | ||||||||||||||||||||||||||||||||
| System Sales | Same-Store Sales | Net New Units | Operating Profit | System Sales | Same-Store Sales | Net New Units | Operating Profit | ||||||||||||||||||||||||||
| Yum China | +8 | +2 | +8 | +14 | +9 | +3 | +8 | (4) | |||||||||||||||||||||||||
| – KFC | +10 | +3 | +11 | +18 | +11 | +4 | +11 | +6 | |||||||||||||||||||||||||
| – Pizza Hut | +1 | – | +2 | +73 | +3 | +1 | +2 | +17 | |||||||||||||||||||||||||
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CEO and CFO Comments
«Fourth quarter results marked a strong finish to a solid year. We achieved our 13th consecutive quarter of system sales growth since the spin-off, and our operating profit grew double digits,» said Joey Wat, CEO of Yum China. «In 2019, we expanded our footprint with over a thousand new stores, setting a new record for Company annual store openings and further strengthening our leading market position. We continue to innovate and invest across multiple fronts to ensure an excellent customer experience, both online and in-store.»
Joey Wat continued, «Looking into 2020, the coronavirus outbreak is a major public health situation in China. Our top priority is the health and safety of our employees and customers. We have implemented various preventative measures across our restaurants and other workplaces to help protect our employees and customers. We will continue to monitor this fluid situation and respond accordingly. Despite this challenge and disruption to our business, we remain confident in the long-term market potential in China. We are differentiated by our world-class development, operations and innovation capabilities, which drove our success in the past and will help sustain our growth for years to come.»
Andy Yeung, CFO of Yum China, added, «Our solid profit growth and healthy balance sheet enabled us to return USD 442 million to shareholders in 2019 through dividends and share repurchases. Looking ahead, while it is difficult to fully ascertain the expected impact of the coronavirus outbreak at this time, we can reasonably expect it to materially affect our 2020 sales and profits. Commodity and wage inflation are also expected to remain challenging, especially in the first half. Despite the headwinds, we are committed to grow in China and intend to step up our investment in digital, supply chain and emerging brands to support that growth.»
Dividend and Share Repurchase
- The Board of Directors declared a cash dividend of USD 0.12 per share on Yum China’s common stock, payable as of the close of business on March 25, 2020 to shareholders of record as of the close of business on March 4, 2020.
- During the fourth quarter, we repurchased approximately 1.3 million shares of Yum China common stock for USD 57.2 million at an average price of USD 43.94 per share.
Digital and Delivery
- As of December 31, 2019, the KFC loyalty program had over 215 million members and the Pizza Hut loyalty program had over 70 million members, an increase of 35 percent and 33 percent, respectively, year over year.
- Delivery contributed to 23 percent of Company sales in the fourth quarter of 2019, an increase of 3 percentage points year over year. Delivery services are now available in 1,249 cities, up from 1,118 cities at the end of the prior year period.
- Digital orders, including delivery, mobile orders and kiosk orders, accounted for 61 percent of Company sales in the fourth quarter of 2019, an increase of 17 percentage points year over year.
New-Unit Development and Asset Upgrade
- The Company opened 360 new stores in the fourth quarter and 1,006 new stores for the full year 2019, mainly driven by development of the KFC brand.
- The Company remodeled 416 stores in the fourth quarter and 972 stores for the full year 2019.
Restaurant Margin
- Yum China restaurant margin was 12.4 percent in the fourth quarter of 2019 and 16.0 percent in the full year 2019, compared with 11.5 percent and 15.7 percent in the prior year periods, primarily attributable to sales leverage, productivity improvement and other cost savings, partially offset by wage and commodity inflation and promotional activities.
2020 Outlook
- The Company provides the following fiscal year 2020 targets, subject to revision based on the impact from the coronavirus:
- Between 800 and 850 gross new stores.
- Capital expenditures between USD 500 million and USD 550 million.
Impact of Coronavirus Outbreak
Since the start of the year, the novel coronavirus outbreak in China has significantly impacted the Company’s operations. The situation is complex and rapidly evolving, and the Company cannot yet fully ascertain the expected impact. However, based on information currently available, the Company believes that the outbreak is likely to have a materially adverse impact on the Company’s operating and financial results for the first quarter of 2020 and full year 2020.
The Company has taken a number of measures to protect its employees, customers and business partners, including the temporary closure of more than 30 percent of its restaurants in China. For restaurants that remain open, same-store sales since the Chinese New Year holiday period were down 40-50 percent compared to the comparable Chinese New Year holiday period in 2019, due to shortened operating hours, reduced traffic and other factors related to the outbreak. At this time, the Company cannot forecast when the closed restaurants will re-open (and at what rate) and the traffic will be restored (and at what level), or the other factors relating to the outbreak that will continue to impact the Company’s operations. Furthermore, the Company may be required or otherwise decide to close additional stores, reduce operating hours, or take other steps, as the situation warrants.
As a result of the outbreak, the Company may experience operating losses for the first quarter of 2020, and if the sales trend continues, for the full year 2020. Future operations, as well as the Company’s cash flows and financial position, may be materially and adversely influenced by further developments related to the outbreak, including potential additional announcements and actions from the central government and local authorities, disruption in our supply chain, inability to provide safety measures to protect our employees, or other reasons.
